The United States dollar has enjoyed a very rapid rally since mid-2021. However, the appreciation of the US dollar index or DXY stalled before touching the threshold of 115.00. 

Towards the end of the last trading day of 2022 later tonight (30/December), Dixie slumped at its lowest range since June below the 104.00 threshold. There are two factors which took the essential roles. 

The issue of slowing the pace of the Fed's rate hike has been the catalyst for the weakening of the USD exchange rate in recent months. That is still becoming a concern owned by people. 

On the other hand, the change in policy direction of the European central banks and Japan eroded the advantage of the US dollar against its two main rivals in the forex universe. 

Prediction of USD Position Next Year

The easing of COVID quarantine rules in China also strengthened the momentum of commodity currencies, thus negatively affecting the greenback. Will the weakening of the US dollar continue until next year? 

The majority of analysts agree that the Fed's policy direction will play an important role in the outlook for the USD. If the Fed does slow or even stop raising interest rates, then the greenback could potentially continue its weakness. 

However, the greenback has a chance to rally again. It is especially if the Fed turns out to have to raise interest rates more aggressively than previously expected.

The outlook for the US dollar in the short term is also more optimistic. The reason is that the market continues to fumble for the direction of the Fed's policy before the next FOMCme ting in late January or early February. 

MUFG Predicted the Corrective Rebound for USD

MUFG summed up that uncertainty in one of its latest projections. They remain confident the USD will still in a weakening trend (in 2023), but there is now a higher risk of a corrective rebound in the short term.

The higher Dot Plot (a scheme describing the official interest rate forecasts of Fed officials -ed) makes the USD market more sensitive to the shock of higher inflation at the beginning of next year.

It remains to occur although the underlying inflation trend is still declining. The release of higher inflation data could trigger a sharper rebound for the USD and increase market volatility.

A number of analysts argue that the weakening of US dollar in December is reasonable and in line with its seasonal trends. Based on seasonal trend data as well, this currency is usually mighty in January. 

Greenback usually weeks in December

Elsewhere, the Analysts from ING Bank reported in a note before Christmas. They think DXY may close the year around the current level. In line with seasonal trends, December is a weak month for the greenback. 

Keep in mind (anyway) that the dollar has strengthened every January in the last four years. Their outlook for early 2023 is still skewed towards the recovery of the dollar.

Meanwhile, The surge of COVID cases in various countries has again rose the concerns. Worldometer showed their data that Japan is experiencing an increase in new cases and the highest death toll in the daily base.

Market is Affected by Worsening COVID-19 Cases 

This is what prompted many countries to require migrants from China to pass the COVID test. Meanwhile, the easing of quarantine has trihgered fears of the new Coronavirus variant. 

Some analysts expect this uncertainty to worsen market sentiment in the short term. That is although China's easing of the quarantine is a positive decision for the global economy over a longer period of time. 

A lot of countries are adopting additional testing stages for travelers coming from China. This is reflecting the continuation of (international) travel that is limping amid the surge of Covid cases.