The US dollar is likely to trend weaker in 2023 after hitting record highs against every major currency this year, as emerging markets recover and inflation eases, according to a new analysis.

The value of the greenback hit a 20-year high in 2022, supported by the US Federal Reserve’s interest rate hikes and geopolitical uncertainty.

In its new report, EFG Hermes said the US dollar has already reached “very overvalued levels” and is due for correction in the coming new year.

“We think another peak may have been reached in late 2022. The real appreciation has been larger and lasted longer than in the two previous periods. That appreciation sows the seeds for the dollar’s weakness through a current account position,” EFG Hermes said.

“The deficit on that measure is expected to top 3% of GDP in 2023, typically a point of vulnerability. With the US Fed tempering and then halting its monetary tightening… suggest a weaker dollar trend.”

The bank also noted that conditions in the emerging markets are improving as COVID restrictions in China are eased and the housing market stabilizes. Improved relations between Europe and China, coupled with a strong Japanese economy, will also support emerging markets.

The weaker forecast for the US dollar is one of EFG Hermes’ top ten themes for the year ahead. The bank also expects inflation to subside next year, while geopolitical tensions should ease as well.

As for the US dollar, EFG Hermes said US sanctions against Russia could, in the future, be used against other countries, dissuading some from holding US dollars.

“One perennial issue is whether the US dollar’s status as a reserve currency will be challenged. The demise has been claimed in the past but has failed to materialize,” it said.

“For now, however, there are no viable alternatives to the US dollar as the world’s reserve currency.”

However, some analysts said that recession worries could keep the US dollar’s strength in 2023.

(Reporting by Cleofe Maceda; editing by Mily Chakrabarty)