Oliver Mangan: Dollar trades in tight range against euro — for the time being 

It has been much smoother sailing in currency markets this year, compared to previous years

The Canadian, Australian and New Zealand dollars, as well as the Swiss franc, have been quite range-bound this year.

We have seen big movements in bond and equity markets so far this year, with considerable volatility in trading, amid mixed signals from economic data and changes in expectations on the outlook for interest rates. 

However, while asset markets have been very unsettled, the major currencies have operated within relatively narrow trading ranges, with the notable exception of the continued weakening of the yen.

This is in marked contrast to the big currency moves seen in 2021 and 2022, when the dominant theme in foreign exchange markets was the strength of the dollar.  It gained over 25% on a trade-weighted basis between the end of 2020 and autumn of 2022 on the back of numerous factors, including a rapid rise in US interest rates, elevated risk aversion in markets and heightened geo-political tensions.

It has been much smoother sailing in currency markets this year. Against the euro, the dollar has been largely confined to a $1.05 to $1.12 corridor, compared to the wide $0.96 to $1.23 trading range seen in 2021-22. 

Meanwhile, sterling against the euro has moved in a narrow 85 pence to 89.5 pence range so far this year, with the UK currency being much more stable in 2023. 

Similarly, the Canadian, Australian and New Zealand dollars, as well as the Swiss franc, have been quite range-bound this year. The main exception has been the continued marked weakening of the yen as the Bank of Japan continues with a very loose monetary stance.

This provides a clue to the stability of the other major currencies in 2023. Their central banks have become far more aligned on monetary policy this year.  They all tightened rates aggressively in the first half of 2023, and then put policy on hold during the second half of the year. 

At the same time, they are warning of the need to maintain interest rates at restrictive levels for a prolonged period of time to bring inflation down to 2%, ruling out any cuts to rates in the near term.

Futures contracts are pricing in that rates will be cut by 100 basis points to 140 basis points in the UK, eurozone, and the US by end the end of 2025, indicating markets expect the monetary policies of the main central banks to remain very aligned over the next couple of years. 

If central bank policies remain very much in sync, it suggests the main currency pairs could stay quite range-bound in the coming year and in 2025.

However, forex markets don’t usually remain within narrow trading ranges for long periods. In this regard, the dollar remains at an elevated level after its big gains in 2021-22, so it may be at the most risk of falling. 

The US economy has outperformed again this year, but the dollar may be vulnerable if the economy starts to slow sharply, as has already happened elsewhere.

The US would also appear to be ahead of other countries in the journey to bring core inflation back down to 2%. This opens up the scope to cut relatively high US rates more quickly than elsewhere, if the economy does indeed turn down. 

The financing of the large twin US fiscal and balance of payments deficits could also start to get more attention in such circumstances. This would not be good news for the dollar either, but for now range trading seems the order of the day.

• Oliver Mangan is chief economist at AIB