The dollar’s summer strength could be threatened if the Fed undoes tightening later this year. A note from Evercore ISI says the greenback’s strength has been “explosive.” Analysts still see upside for the dollar for the remainder of the year. Loading Something is loading.
The summer rally that has ignited the dollar could wane if the Federal Reserve loosens monetary policy again as inflation cools.
A note from Evercore ISI analysts lead by Julian Emanuel posits that because the dollar’s surge largely stemmed from a hawkish central bank and strong US growth, its climb could be capped if inflation comes down to a point that satisfies the Federal Reserve.
“The USD rally over the last two years has heretofore been explosive,” Emanuel wrote. He added that Wall Street may have been too soon to assume the Fed will believe inflation has subsided enough to reverse tightening.
The greenback has edged toward 20-year highs so far this year, even as haven assets like gold slump. The central bank has raised benchmark interest rates four times in the past five months, and hasn’t ruled out future additional tightening.
“The dollar trade is moderating after hitting some historic levels with the euro and yen,” said Edward Moya, senior market analyst at OANDA.
But analysts on the other side of the picture say sluggish growth elsewhere could push the dollar higher, because the dollar has already benefited from recession worries in countries like China and the UK. “Dollar dominance,” Moya added, “will probably remain in favor as safe-haven flows grow on global economic slowdown reality.”
“China’s growth slowdown this year has also contributed to US dollar strength particularly against Asian EM currencies such as the Chinese yuan and Korean won,” said Alvin Tan, head of Asia FX strategy at RBC Capital Markets. Tan added that his firm expects “appreciation through the new year.”
Even if recession fears in the US exacerbate dramatically and pushes the foreign currencies like the yen higher, Moya says such a scenario “doesn’t mean the dollar index will break” and would thus “still be supportive for both the yen and dollar.”
See the latest EUR-USD movements here.