The U.S. dollar will maintain a bearish trend for a long period as the Federal Reserve and peers begin interest rate cuts, according to Standard Bank head of G-10 strategy Steven Barrow.
“Our call for the dollar to enter a multi-year downtrend is partly based on the fact that the Fed’s tightening cycle will morph into an easing cycle, and this will pull the dollar down even as other central banks cut as well,” said Barrow in a research note.
The greenback hovered around a 15-month low in Asian trading on Monday local time. The currency posted a two percent loss last week, its steepest weekly drop since November last year.
Other experts shared similar opinions with Barrow. BNP Paribas fund manager Peter Vassallo said the dollar would “most likely” continue its weakness in the coming months. Vassallo also predicted that the New Zealand dollar, Australian dollar and Norwegian krone would gain as pressures from the greenback ease.
Bloomberg macro strategist Simon White said the dollar would maintain its downward trend as the real yield curve flattened. According to White, the real yield curve is a leading indicator for the U.S. dollar. He explained that the dollar’s value is “driven at the margin by the real return of foreign investors into US yields.”
Analysts say many investors “have been waiting” for the dollar to weaken for some time. Fund managers expect the downward trend in the dollar to support a rally in the Japanese yen and emerging market currencies.
Goldman Sachs predicts the greenback will decline to $1.15 per euro by next year from around $1.12 today. It also forecasts the yen to strengthen to 125 per dollar from about 139 recently.
More data needed
Despite the recent signs of a weakening dollar, some analysts suggest investors watch out for more data. Invesco head of multi-asset and fund manager Georgina Taylor said there was still a possibility that the Fed would prolong its monetary tightening cycle.
“The interest-rate differential story is wavering but I wouldn’t give up on the dollar,” said Taylor.
Fed fund futures predict that the U.S. central bank will increase its benchmark rate by 25 basis points this month, which they also expect will be the last rate hike of this cycle.
Michael Cahill, a G-10 FX strategist at Goldman Sachs, said the future dollar downturn would likely be shallower than the past cycles because of the U.S. economic resilience. Cahill, nevertheless, said the dollar could lose its support if the Fed made a policy pivot while the European Central Bank kept its key rate higher for a longer period.
According to Amundi director of currency strategy Paresh Upadhyaya, the U.S. dollar is currently “very overvalued.” He predicted that global markets would begin to reduce their exposure to the U.S. currency, lowering its value in forex trading.
Upadhyaya explained that the U.S. deficits in trade and budget would become structural headwinds for the dollar’s trend in the future. However, he pointed out that the “dollar smile theory” could come into effect.
The theory refers to a market thinking that the greenback gains when the U.S. economy experiences a severe downturn or an expansion. On the other hand, the dollar typically falters when the economy experiences moderate growth.
Impact of declining dollar
In the U.S., a weakening dollar will lead to more expensive imports. At the same time, a softer dollar will boost the exports of American firms. On the other hand, developing nations will see reduced import prices, which will ease their inflation pressures.
The easing pressures from the greenback will also contribute to gains in dollar-priced commodities, such as oil and gold. Analysts also maintain that oil will likely rally due to potential high demand from China.