Diverging Dollar Forecasts: "Weakness for Years" vs "King Dollar Isn't Over"

Dollar Index Hits Lowest in 15 Months
"Weakness Lasting from Several Months to Years"
Reducing Dollar, Increasing Yen and Emerging Market Currency Shares
"Too Early to Expect Fed Tightening to End" Criticism Also Raised

As the U.S. Federal Reserve (Fed) is expected to end its tightening cycle, the value of the dollar has fallen to its lowest level in over a year, sparking mixed forecasts about the dollar's future direction. While the number of investors betting on a weaker dollar is increasing and some predict that the dollar's weakness could last for years, cautious views remain significant.

According to the global foreign exchange market on the 17th, the dollar index stood at 99.95, marking its lowest level in 15 months since closing at 100.39 in April last year.

Steven Barrow, Head of G10 Strategy at Standard Bank, said, "Our forecast that the dollar will enter a period of weakness lasting several years is partly based on the fact that the Fed's tightening cycle will shift to a loosening cycle," adding, "This will cause the dollar's value to decline even if other central banks cut their benchmark interest rates."

A weaker dollar reduces import prices for developing countries and eases inflation. U.S. companies are expected to benefit from improved export performance. The value of other currencies, such as the yen, which has shown weakness in recent months, is rising. Consequently, more investors are betting on a decline in the dollar's value and increasing their holdings in other national currencies. Peter Vassallo, BNP Paribas fund manager, expanded investments in the Australian dollar, New Zealand dollar, and Norwegian krone, stating, "The most likely path is that the dollar will remain weak for the next few months." Swiss UBS is investing in emerging market currencies, and M&G Investments is investing in the yen.

Paresh Upadhyaya, head of foreign exchange strategy at Amundi Asset Management, said, "From a valuation perspective, the dollar is still overvalued," and forecasted that "(the dollar) will lose strength."

On the other hand, some argue that betting on a weaker dollar is premature. The timing of the Fed's end to tightening and the global economic outlook remain key variables.

Georgina Taylor of Invesco Asset Management said, "Although interest rate differentials are narrowing, the absolute difference in real yields (between the U.S. and other central banks) remains high, so the dollar will not be abandoned." For example, the European Central Bank (ECB) benchmark interest rate is currently 4.0%, while the Fed's benchmark rate is 5.25%, more than 1 percentage point higher than the ECB.

Bob Prince, Co-Chief Investment Officer (CIO) at Bridgewater Associates

There is also analysis that the Fed's pivot?meaning a shift in monetary policy direction?that would pull down the dollar's value is premature. Bob Prince, co-Chief Investment Officer (CIO) of Bridgewater Associates, the world's largest hedge fund, recently told foreign media, "The Fed will not cut rates," explaining, "Although inflation has decreased, it is still too high and is likely to remain at the current level." Last month, the U.S. consumer price index rose 3.0% year-on-year, the lowest in two years and three months, which had raised market expectations for rate cuts. He emphasized, "Despite market expectations for rate cuts, the Fed can maintain rates steadily," and added, "Bridgewater is aligning its investment portfolio with the tightening cycle."

As uncertainty about the U.S. economy grows heading into the third quarter, there is also speculation that demand for the safe-haven dollar could increase. For the dollar to show a strong downward trend, economic improvements in countries outside the U.S., such as China and Europe, are necessary. However, since other countries are also facing challenging economic conditions, the view is that the dollar's weakness will remain limited.

This content was produced with the assistance of AI translation services.