Which currencies will be the top performers in 2023?

The greenback is likely to remain a safe haven if the global economy slips into recession and the Fed continues its rate increases

Although the US dollar was the world’s financial safe haven in 2022, many traders feel it could slide in 2023. AFP
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No question, 2022 was the year of the dollar. While almost every other global asset class fell, the greenback stood proud.

Forget the Swiss franc, Japanese yen, gold and Bitcoin. The US dollar is firmly established as the world’s number one financial safe haven.

But currency performance is cyclical and many traders feel the dollar is now overvalued and could slide in 2023.

So which currencies will fight back in 2023? The euro? The Aussie dollar? The Indian rupee? Or maybe even the beleaguered British pound?

US dollar

No currency is an island. They rise and fall relative to each other, and this year almost every currency has been falling against the US dollar.

The greenback is up more than 14 per cent against the Japanese yen in 2022 and 12 per cent against the pound. It has also climbed more than 7 per cent against the euro, Australian, Canadian and New Zealand dollars.

The dollar has also been boosted by a hawkish US Federal Reserve, which has lifted interest rates to a 15-year high as it battles inflation.

The Fed funds rate has shot up from 0.25 per cent at the start of the year to 4.5 per cent today, and is projected to peak at 5 per cent or even 5.25 per cent next year.

High interest rates boost currencies by attracting global money because investors get a higher return.

The dollar has performed a “high-wire act” but may struggle to sustain its dominance once the Fed switches later in the year and starts cutting interest rates, says Chris Turner, global head of markets at ING Group.

The dollar has performed a high-wire act but may struggle to sustain its dominance once the Fed pivots later in the year and starts cutting interest rates
Chris Turner, global head of markets, ING Group

Mr Turner predicts a volatile year for every currency in 2023, including the greenback.

“Conditions do not look to be in place for a clean dollar trend, with neither a ‘risk-on’ dollar decline nor a ‘risk-off’ rally.”

It is too early to write off the dollar because it would remain a safe haven if the world slips into recession, says Fawad Razaqzada, market analyst at City Index and Forex.com.

“I would not be surprised if it bounced again, setting the stage for another bullish run.”

Verdict: The dollar is still the one to beat. It would take a brave trader to bet against it.

The euro

This has been a tough year for Europe, as a war rages in Ukraine, energy prices soar and growth slows.

It has been tough for the euro, too, which trades at just $1.061, down from $1.137 at the start of the year.

It could end 2023 close to parity at $1 as the German economy struggles to “re-orientate itself to a new world order”, Mr Turner says.

However, it could get a boost from the increasingly hawkish European Central Bank, which raised its main interest rate to 2.5 per cent in December and warned of more to come as inflation remains “far too high and is projected to stay above the target for too long”.

German analyst Heraeus has pointed out that the euro tends to rebound after rapid falls against the dollar and may appreciate next year.

Verdict: At some point, the euro will recover. We’re not there yet.


The British pound has had a miserable year, falling faster than any major global currency except the Japanese yen.

It threatened to hit parity with the dollar in September, but recovered to trade above $1.20 after Rishi Sunak replaced Liz Truss as prime minister.

Sterling is sliding again due to widespread industrial action and a Bank of England split over interest-rate policy, Mr Razaqzada says.

“Rate increases might stop sooner than expected as high inflation continues to hurt consumers,” he adds.

Jonathan Watson, account manager at currency brokers Lumon, is also concerned. “We see a definite negative bias for sterling, amid concerns over recession and a predicted slowdown in economic activity.”

Yet, the gloom may be overdone and Morgan Stanley has named a pound recovery as one of its Top 10 Surprises for 2023, as energy prices fall and inflation eases.

Verdict: Any pound recovery is likely to be very, very bumpy.

Japanese yen

The Japanese yen hit a 32-year low against the US dollar this year, making it the worst performing global currency of all. At its low in November, it was down almost 25 per cent.

While every other central bank has been raising interest rates to combat inflation, the Bank of Japan’s benchmark rate is the last in the world to remain negative at -0.1 per cent.

That could change after inflation hit a 40-year high of 3.6 per cent in November, forcing the BoJ to lift the interest rate cap on 10-year government bonds from 0.25 per cent to 0.5 per cent.

In Japanese financial circles, that’s a big deal.

Verdict: The yen may snap back further in 2022.

Canadian dollar

The “loonie” has gained 7 per cent this year as the Bank of Canada raised its key lending rate to 4.25 per cent in December to combat inflation.

High global commodity prices should help support loonie strength, says Vijay Valecha, chief investment officer at Century Financial.

“The currency can become a significant pro-cyclical bet,” he adds.

Verdict: 2022’s best performing commodity dollar should hold up well next year.

Australian dollar

The Australian economy has been hit by slowing Chinese demand for its commodity exports and real estate, but may benefit as Covid lockdowns are eased, Mr Valecha says.

“While the commodity outlook is positive, a slowing housing market and possible softening in the labour market could exert more downside pressure on the currency,” he says.

Verdict: The Aussie dollar could struggle again.

New Zealand dollar

The Reserve Bank of New Zealand lifted interest rates to 4.25 per cent this year and markets expect them to peak at 5.5 per cent next year.

That is higher than in the US, squeezing the country’s rapidly slowing housing market but supporting its currency, Mr Valecha says.

“The New Zealand dollar’s prospects still look bullish.”

Verdict: Positive.

Indian rupee

As a major oil importer, the Indian economy has been at the sharp end of the energy shock, with the rupee falling almost 10 per cent against the dollar.

The recent oil price retreat has done little to help, Mr Valecha says.

“India’s widening $110 billion trade deficit implies rupee bearishness going into 2023, despite positive Indian stock market inflows.”

If the oil price falls further, that would help, otherwise “the bearish pressure could remain alive for another year”, he adds.

Verdict: Until energy prices fall, the rupee will flounder.

Updated: March 13, 2024, 10:00 AM