The Bearish Case for the Dollar: Economic Signals and Predictions
Despite recent stabilization, the US dollar faces a tough road ahead, with deep-rooted issues in the regional banking system threatening the wider economy. Credit conditions are tightening beyond the effects of Federal Reserve rate hikes, suggesting a downturn may be imminent. We predict the Fed will counter with 100bp of cuts this year.
Contrastingly, the European Central Bank (ECB) maintains its hawkish stance, with only one more 25bp hike expected this year. Rate cuts are not anticipated until the second half of 2024. This divergence between the Fed and ECB has prompted us to revise our EUR/USD forecast higher, expecting a peak at 1.20 in late 2023 or early 2024 before falling to 1.15 as the ECB begins easing.
The short-term outlook for the dollar is complex. While banking stress and the US debt ceiling stalemate could temporarily support the dollar by increasing safe haven demand, the longer-term impact could be detrimental.
We reaffirm our bullish stance on the yen following the Bank of Japan’s unexpected hawkish tilt. Meanwhile, we predict the GBP/USD will surpass 1.30 by year-end, though we still expect the euro to outperform sterling.
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