Key Takeaways:
US dollar has stabilized after August fall
US currency still down 1.6% over the month
Bank of America sees three reasons to stay bearish on Dollar Index- DXY index fell an average of 4% in previous bearish episodes
Broad USD trade-weighted indices suggest USD remains overvalued
USD selloff concentrated in European currencies- US 10y Treasury yield tends to fall after first Federal Reserve cut
Global financial conditions set to loosen further
Bank of America Securities predicts more trouble ahead for the US dollar
Historical context suggests Dollar Index may continue its downtrend
USD remains overvalued according to broad nominal and real USD trade-weighted indices
Other central banks cutting rates may indirectly weaken the USD- DXY index historically tends to continue its downtrend after bearish breakouts
Global financial conditions are set to loosen further, potentially leading to USD weakness
The US election is considered a top risk to the global economic outlook- Investors are focused on the behavior of the US economy and potential interest rate cuts by the Federal Reserve
- Bank of America lowered its forecast for global economic growth due to a weakening outlook for China
Uncertainty surrounding candidate policy platforms is leading investors to be cautious in their market bets- World Bank expected to revise down forecast for global growth due to increasing downside risks
Analysis:
The US dollar has faced significant challenges in recent months, with the currency showing signs of weakness. Despite a stabilization after a fall in August, the US dollar is still down 1.6% over the month. Bank of America has expressed bearish sentiment towards the Dollar Index, citing various reasons including historical data showing previous bearish episodes resulting in a 4% average fall in the DXY index.
Global financial conditions are expected to loosen further, potentially leading to more weakness in the US dollar. Additionally, the US election is seen as a top risk to the global economic outlook, adding to uncertainties surrounding the currency’s future performance. Investors are closely monitoring the behavior of the US economy and potential interest rate cuts by the Federal Reserve, as well as being cautious due to uncertainty surrounding candidate policy platforms.
With the World Bank expected to revise down its forecast for global growth and Bank of America lowering its forecast for economic growth due to a weakening outlook for China, the future of the US dollar remains uncertain in the face of increasing downside risks. Other central banks cutting rates may indirectly impact the strength of the USD, further adding to the bearish outlook on the currency.