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The Future of the U.S. Dollar


The slide in the U.S. dollar over the past eight months raises concerns that its gains since the start of the pandemic may soon be erased, warns Kit Juckes, a respected macro strategist at Société Générale.

Uncertainty Looms as Interest Rates Come into Play

In a recent note shared with SocGen clients and the media, Juckes highlights the potential for the greenback to return to its lows witnessed in December 2020. This shift is attributed to market expectations of an end to interest rate hikes by the Federal Reserve in the coming year.

Factors Influencing the Dollar’s Trajectory

Juckes draws parallels with the January/February period, prior to the “SVB mini crisis,” suggesting that the market is once again anticipating a peak in U.S. rates and a narrowing in relative rates. However, Juckes acknowledges that further convergence in interest rates between the U.S. and other major economies will be necessary for significant movement in the Dollar Index.

Recent Shift in Investor Expectations

In the past week, investor sentiment regarding future interest rates in the U.S. has undergone a notable shift. Weaker-than-anticipated readings on June inflation, as measured by the consumer price index and producer price index, have led many investors to believe that the Fed will only raise its policy interest rate once during its upcoming meeting.

Looking Ahead: Rate Cuts on the Horizon?

Fed funds futures, which allow for speculation on interest rate trajectories, currently indicate an approximately 100% likelihood of a rate hike in July. However, market analysts also believe that rate cuts may be on the table by the time of the Fed’s January policy meeting, with futures already reflecting a nearly 40% probability of a reduction, according to CME’s FedWatch tool.

In conclusion, while the path of the U.S. dollar may not be linear, it seems increasingly likely that interest rate dynamics will play a crucial role in its future performance vis-à-vis other major currencies.

The Dollar’s Decline and its Impact on Markets


Dollar’s Recent Performance

In December 2020, the dollar briefly weakened below 90, marking its lowest level in over two years at the time. However, it later experienced a peak in late September 2022, trading just shy of 115. This was the highest level it had reached in over two decades. The question now arises whether this peak will be a long-term cyclical high. Interestingly, since 2007, the dollar has consistently traded at higher lows, indicating a potential shift in its trajectory.

The Dollar-Yuan Relationship

Another significant factor to consider is the relationship between the U.S. dollar and the Chinese yuan. Some experts foresee both currencies weakening together. Analysts expect the yuan to climb to 7.40 against the dollar by the end of the year, a level unseen in approximately 15 years. Currently, the onshore renminbi, incorporating the yuan’s controlled exchange rate within China, is trading at 7.18 with a slight dollar gain of 0.1%.

Impact on Markets

While a weaker dollar may result in increased prices for imported goods and more expensive international travel for American consumers, it could also have positive implications for U.S. equity prices. Exporters can benefit from their earnings being boosted by the slide in currency value. Additionally, the chances of a global recession may diminish as a result.

In conclusion, the U.S. dollar’s recent decline has garnered attention and raised questions about its future trajectory. Analysts are monitoring the potential long-term consequences of this shift, including the correlation with the Chinese yuan’s performance. The impact on markets remains uncertain but is likely to have both positive and negative implications which need to be closely observed in the coming months.

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