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The slide in the U.S. dollar in the last eight months could mean that mean all of its gains in the wake of the coronavirus pandemic will soon be lost, according to Kit Juckes, a macro strategist at Société Générale who has been a long-time currency analyst.
Juckes said in a note shared with SocGen clients and the media on Tuesday that he expects the greenback could return to its lows from December 2020, the level it fell to during the pandemic given the market is pricing in an end to interest rate rises by the Federal Reserve this year.
“As was the case in January/February before the SVB mini crisis, the market is anticipating the peak in US rates and a further narrowing relative rates. If nothing happens to scupper those expectations (another upside surprise in US growth, or further European growth disappointment) I would expect the Dollar Index to move closer but not all the way to, the lows at the end of 2020,” he said.
“That won’t happen in a straight line and will require further interest rate convergence between the U.S. and other major economies, however.”
Over the past week, investors’ expectations about the outlook for where U.S. interest rates are headed have shifted. Following lower-than-expected readings last week on U.S. June inflation, as measured by the consumer price index and the producer price index, many investors expect the Fed will raise its benchmark interest rate only once more when the central bank holds its policy meeting next week.
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Fed-funds futures, which are used to bet on the expected path of interest rates, are pricing in nearly a 100% probability of a hike in July, but analysts also think rate cuts could come by the Fed’s January policy meeting, where futures markets already see a nearly 40% probability of a cut, according to CME’s FedWatch tool.
This shift in expectations has triggered a wave of dollar-bearishness across Wall Street, with many top currency analysts opining that the path of least resistance for the U.S. dollar is likely lower.
The ICE U.S. Dollar Index
DXY,
a gauge of the dollar’s strength against a basket of major currencies, was trading modestly higher on Tuesday, up 0.1% at 99.96, but on Monday, the index touched its lowest level since mid-April 2022.
Back in December 2020, it briefly broke below 90 to what was at the time its weakest level in more than two years.
Read more: Why stocks could get a boost from a falling U.S. dollar
Another important question for markets will be whether the dollar’s peak in late September 2022, when the dollar index traded just shy of 115, its highest level in more than two decades, will mark a long-term cyclical peak. As Juckes notes, the dollar has traded at a succession of higher lows since 2007.
Another issue on Juckes’ radar: the prospect that the U.S. dollar and Chinese yuan
USDCNY,
could weaken in tandem. Juckes said he expects the yuan to climb to 7.40 against the dollar by the end of the year, a level it hasn’t seen in roughly 15 years.
The onshore renminbi, which incorporates the yuan’s more tightly controlled exchange rate within China, was trading at 7.18, with the dollar climbing 0.1%.
While American consumers could see the price of imported goods rise and international travel become more expensive, a weaker dollar could also help boost U.S. equity prices, as earnings of exporters get a boost from the currency’s slide, and the chances of a global recession eases, as MarketWatch reported on Monday.
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