Which currencies will be the top performers in 2022?

Delta and Omicron uncertainty and strong US economic growth boost the greenback’s safe haven appeal

The US Dollar Index is ending the year trading more than 7 per cent higher, its biggest annual gain in six years. Reuters

As 2021 draws to a close, this year’s currency winners and losers are becoming clear. The US dollar retained its supremacy, while the euro disappointed. The Japanese yen, seen as a safe haven currency, had a disappointing year despite Covid-19 uncertainties, while the British pound was boosted by a successful vaccination programme, then ran out of steam.

So who will be the winners and losers next year?

US dollar

The US dollar was expected to underperform in 2021 as the world threw off its Covid-19 shackles and investors sought out riskier and more rewarding currencies.

It wasn’t to be, as Delta and Omicron variants triggered yet more exhausting lockdowns.

Nervous investors drifted back to the safe haven greenback, with strong US economic growth another pull, Lawrence Kaplin, chief market analyst at Equals Money, says. “These two factors combined to make the dollar the best performing G10 currency.”

The US Dollar Index is ending the year trading more than 7 per cent higher, its biggest annual gain in six years.

Mr Kaplin forecasts another 5 per cent rise in 2022, driven by US Federal Reserve tightening, with markets anticipating three or four interest rate increases.

“The US economy will continue to outperform other developed nations by some margin,” he says.

Future dollar performance depends on whether the US Senate approves President Joe Biden’s $2 trillion Build Back Better Framework, Vijay Valecha, chief investment officer at Century Financial, says. “If it doesn’t, US economic growth will fall and take the dollar with it.”

Euro

The European single currency has endured another “bruising” year, falling more than 6 per cent against the US dollar and sterling, Mr Kaplin says.

“We expect the euro to decline a further 5 per cent in 2022, dogged by above-target inflation and anaemic wage growth,” he adds.

We expect the euro to decline a further 5 per cent in 2022, dogged by above-target inflation and anaemic wage growth

Lawrence Kaplin,
chief market analyst, Equals Money

The European Central Bank has said it does not expect to raise interest rates before the end of 2022.

“This puts them at stark odds with the US and UK, where markets are pricing in three rate rises by the year-end,” Mr Kaplin adds.

Chaddy Kirbaj, vice director at Swissquote Bank, is more optimistic. He thinks the ECB will be forced to change its forward guidance and increase interest rates, after eurozone inflation hit 4.9 per cent in November, the highest since 1991.

“The euro fell almost 8 per cent against the US dollar in 2021, but should stage a gradual recovery in 2022,” Mr Kirbaj says.

Sterling

The British pound had a “mixed” 2021, falling more than 3 per cent against the US dollar but rising 6 per cent versus the euro.

Sterling was boosted by the UK’s swift vaccine roll-out programme but then other countries caught up. “Omicron tightening is now hurting the recent recovery and hitting the pound,” Mr Kaplin says.

In December, the Bank of England surprised markets by becoming the first major central bank to increase interest rates, from 0.10 per cent to 0.25 per cent.

Markets are pricing in a further three or four increases next year but Mr Kaplin says that looks optimistic given current uncertainties.

Brexit trade negotiations continue to cast a shadow over the economy, while consumers will be squeezed by the soaring cost of living and a string of planned tax increases, Mr Kaplin adds.

Sterling has been hit by political risk as Prime Minister Boris Johnson’s popularity plummets, Hinesh Patel, portfolio manager at Quilter Investors, says.

“For a currency that has already been beaten up in recent years, we don’t see 2022 as a year of recovery.”

Mr Valecha is more optimistic, arguing that the BoE will have to increase rates aggressively, with inflation expected to hit 6 per cent in the spring, driving the pound higher.

Overall, it looks like another mixed year ahead.

Japanese yen

As a safe-haven currency, the Japanese yen has rebounded on Omicron uncertainty, Victoria Scholar, head of investments at Interactive Investor, says. “If the global economy slows as a result and shares crash, it could climb higher.”

Morgan Stanley and Goldman Sachs have tipped Japanese equities to perform strongly in 2022 due to low inflation and cheap valuations.

“That could actually spell bad news for the yen, by making Japanese exports more expensive and hitting demand,” she cautions.

The yen is inversely correlated to the Nikkei 225, typically falling when the country’s stock market rises (and vice versa).

This could put pressure on the yen next year, Ms Scholar adds.

Australian and Canadian dollars

Both the Australian dollar and Canadian loonie are “commodity currencies”, as both countries rely on exporting metals and minerals for income, Laith Khalaf, head of investment analysis at AJ Bell, says.

The Bloomberg Spot Commodity Index rallied by more than 20 per cent in 2021 as the price of raw materials soared, but growth is expected to slow next year.

Mr Khalaf reckons that the Australian dollar and loonie will underperform in 2022 as a result.

“China is the world’s biggest commodity consumer but gross domestic product growth is set to hit a 30-year low of 4.9 per cent next year due to the Evergrande debt crisis and souring trade relations with the US,” he says.

Demand for iron ore, one of Australia’s biggest exports, has already halved, he adds.

No currency moves in isolation, Ms Scholar says. “The loonie barely grew against the strong US dollar this year, but strengthened by almost 8 per cent against the euro.”

If the global economy shrugs off Omicron, then commodity currencies could surprise, Ms Scholar says.

“The Reserve Bank of Australia has suggested economic conditions will not support higher interest rates until 2023, which could lead to further Australian dollar depreciation,” she adds.

Indian rupee

The Indian rupee is under pressure as investors fret over the country’s low vaccination rates, with just more than a third of the population double-jabbed, Ms Scholar says. “India’s economy could be hit hard by another wave of Covid-19 lockdowns.”

India imports 80 per cent of its oil, so the rupee has been hit by the recent surge in crude prices, she adds.

“The recent pullback in oil has helped but many analysts are forecasting higher crude prices in 2022, which could act as a headwind for the rupee,” Ms Scholar says.

If the oil price and inflation fall next year, the rupee could swing back into favour, Mr Kirbaj forecasts.

Cryptocurrency

The year 2021 saw yet another wild ride for cryptocurrencies, with Bitcoin opening the year at $29,388, peaking at $67,582 in early November, then falling to around $50,000 at the time of writing.

Next year will bring more spikes and dips, driven by inflation and market sentiment, Adam Berker, senior legal counsel at global cryptocurrency payments provider Mercury, says.

“Adoption should continue to grow, as our research shows three in five financial services businesses are seeing increased demand to use cryptocurrency as a payment option,” he adds.

Volatility could make businesses reluctant to accept cryptocurrency when they have bills to pay in dollars, euros and pounds, Mr Khalaf says.

Regulatory activity is another threat.

“Regulators don’t like the idea of a financial system which can be used to launder money and scam consumers, and lead to heavy losses among investors. Crackdowns in India and China could be repeated elsewhere,” he says.

As in 2021, the biggest impact could be Tesla founder Elon Musk’s Twitter feed, Mr Khalaf concludes. “You might as well roll a dice on a spinning roulette wheel to predict where crypto goes next.”