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How is the dollar’s dominance impacting the luxury real estate market?

13 March 2023

It has been an interesting run for luxury property buyers over the course of the last 6 months or so. Quite remarkable how the market can flip from armageddon with lending rates at record highs, only for the world to be all rosy again with just the slightest adjustment back down.

Interest rates are not the only element affecting demand, however. Currency fluctuations have also played a big part in driving foreign investor appetite for UK and European luxury property.

It goes without saying that the 24% drop on GBPUSD in the autumn got the phones ringing and still this continues almost 6 months on, even with progressive recovery of the pound.

So the question is, will this dollar dominance continue throughout 2023?

As you would expect, much hangs in the hands of the Fed and the BoE.

Near-term dynamics for GBP/USD suggest that while the pair may rebound above the $1.20 threshold, the persistent negative impact of surging energy prices on UK terms of trade will remain a key factor. However, market observers anticipate that the devalued pound may become an appealing proposition as central banks pivot, potentially propelling GBP/USD to exceed baseline projections.

Despite being 15% overvalued against G5 major currencies, the dollar still appears expensive from a valuation standpoint. According to the Oxford Economics' BEER model, GBP/USD is currently undervalued by about 8%. If only the FX market was truly driven by value!

A potential Fed signal to cut rates this year was the real hope for dollar buyers. Market experts had anticipated that dollar weakness may emerge during Q1 of 2023, as we transition from stagflation risk characterised by weak growth and high inflation to a more conventional late economic cycle marked by feeble growth and moderating inflation. This shift could alleviate pressure on the Fed to hike, thus resulting in a weakening of the dollar. The triggers are yet to surface however with the FOMC preferring to stay true to its long term target of driving inflation down to 2%.

What about property in the Eurozone?

Well as you would expect, we have seen similar appetite from the states for property in Europe too. Though my other half would insist this is solely down to the success of Netflix's hit show "Emily in Paris," I'd argue that drive and hold towards parity on EURUSD rates provided just as much of a motivating factor.

It is interesting to note how stagnant GBP EUR remains despite so much geopolitical tension and I think this highlights how both the UK and the Eurozone are struggling to draw a clear course to combat inflation in the months ahead which in turn is making it harder for investors to pick a side.

With thanks to our contributor, Benjamin Small, Director at Ibanista. After 6 years in the industry and leading major sales desks of two different currency brokers in London, Ben decided to use his knowledge to provide premium customer service to our private and corporate clients. He believes the payments industry evolves too fast for large legacy trading floors to react. The only way to provide a premium service was to launch an agile business that could embrace the changes as they come along.

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