FX.co ★ Peak dollar

Billionaire "Bond King" Jeffrey Gundlach believes the Federal Reserve will raise interest rates by another 50 basis points in February, with rates potentially peaking at 5% next year.

But Gundlach doesn't believe the Fed will be able to keep rates at these levels for more than one meeting before being forced to cut. He warned that the Fed may not even make it to 5% because the data is "weakening too rapidly."

DoubleLine Capital's CEO expects the dollar to weaken in 2023, stating that "the dollar has peaked out." According to Gundlach, the Federal Reserve could end up being more dovish than other central banks in 2023, which is what the dollar traders could already be anticipating.

According to CrossBorderCapital, the U.S. dollar index could correct 15-20% next year.

"A stronger U.S. dollar has been a feature of the 2022 bear market in risk assets. U.S. monetary tightness and a rush of foreign capital into U.S. safe havens have lifted the U.S. unit. 2023 will likely see a reversal of both drivers as policy-makers clamber to underpin fragile sovereign debt markets with liquidity and so trigger a 15-20% correction in the U.S. dollar," CrossBorderCapital said.

Sideways price movement:

Predictions of a sideways U.S. dollar action are also popular with analysts for 2023.

"USD outlook hinges on the intersection of 1) global growth 2) terminal rate pricing, 3) terms of trade. While peak USD is here, global growth isn't strong enough to warrant a reversal yet. Expect consolidation in Q1 and a deeper correction afterwards," said strategists at TD Securities.

Other factors to weigh on the U.S. dollar:

Recovery in emerging markets is a significant development that could hurt the greenback next year.

"EM equities are likely to recover as EM currencies strengthen and the U.S. dollar weakens," said Ned Davis Research chief investment strategist Tim Hayes in his outlook for next year.

China's reopening is another theme to watch in 2023.

"China is the elephant in the room when it comes to the global growth outlook for 2023 – a weak 1H23 seems likely, but this will then be followed by far stronger growth in 2H23 – after a poor 2022, Chinese assets could really outperform in 2023," said Pepperstone's head of research Chris Weston.

There is still a lot of uncertainty around China's reopening due to COVID and several economic imbalances, noted Bannockburn Global Forex chief market strategist Marc Chandler.