With leading U.S. banks including Morgan Stanley, JPMorgan Chase, Goldman Sachs, and HSBC projecting a bearish outlook on the dollar, the financial world is anticipating the shift.
The predicted “soft” economic landing, characterized by the stabilization of the economy after a period of expansion without it tipping into a recession, seems to diminish the urgency for the U.S. Federal Reserve to ramp up interest rates.
Retreating confidence in the dollar
The dollar’s standing took a hit recently, reaching a 15-month low against an assortment of other currencies. This decline came on the heels of a larger-than-expected dip in U.S. inflation, prompting investors to reassess their predictions about the Federal Reserve’s monetary policy.
The Federal Reserve has been methodically tightening the reins on the money supply to counter inflation, but the recent data might influence a shift in this approach.
The global growth-inflation equation is showing signs of improvement, further feeding the prospect of a dollar decline, according to HSBC analysts. They anticipate that the dollar will escape the narrow trading range it has been confined to since late 2022.
The dollar’s trajectory has been erratic throughout the year. It gained strength in February due to rising inflation concerns but then fell in March and April following the collapse of several regional U.S. banks.
The deeper dive: Analysis from top banks
Analysts from Goldman Sachs echo the sentiments of HSBC, projecting that the dollar’s current trajectory is just the beginning of a more substantial downward trend.
Morgan Stanley, after previously maintaining an “overweight” stance on the dollar, shifted to a neutral position. JPMorgan Chase reacted similarly, discontinuing its advised dollar trades.
This action was spurred by recent economic data, which they said challenged the previous bullish sentiment toward the dollar.
Speculations on the Federal Reserve’s future actions also factor into this scenario. Traders forecast a quarter-point rate rise for the Federal Reserve’s meeting next week, but speculations for an additional rise in September dwindled after the release of the recent data.
This change reflects a decreased expectation of a rate hike, from a 22% probability to a 14% likelihood, as measured by CME’s FedWatch tool.
Expectations of a soft landing
The recent inflation data, which proved more benign than anticipated, has bolstered trader confidence. A growing number of investors are hopeful that the U.S. economy will sidestep a recession.
According to a recent survey by the Bank of America, only a fifth of investors are bracing for a “hard landing,” a scenario characterized by an economic contraction. This proportion represents a sharp decline from the 68% who were expecting continued, albeit slow, growth.
The currency’s fall has outpaced predictions and stands at odds with current economic data and relative interest rate trends, according to Kit Juckes, a currency strategist at Société Générale.
Notably, the dollar’s weakening has bolstered the euro, pushing it above $1.12 for the first time since Russia’s invasion of Ukraine in February last year.
While the dollar traditionally benefits from higher U.S. interest rates and tends to gain during global recessions due to investors seeking the safety of U.S. assets, the expectation of a soft landing changes the dynamic.
