Despite expectations of significant rate cuts by the Federal Reserve in 2024 and 2025, analysts at the Wells Fargo Investment Institute predict that the US dollar will remain elevated.
Analysts in a note dated Monday cite the reasons behind this forecast, focusing on interest rate differentials, global economic conditions and the performance of the US dollar relative to other major currencies.
Interest rate differentials have been a major factor driving the US dollar's strength in recent years. Since the Federal Reserve began its aggressive rate hike campaign in March 2022, the US dollar has consistently traded above its historical averages.
Now that the Federal Reserve is set to begin cutting rates, it might seem logical to expect a significant depreciation of the dollar.
However, analysts say the dollar is likely to remain within its recent trading range, largely because other major central banks, including the European Central Bank, are also expected to cut rates.
The interest rate differential between the United States and other developed economies is expected to persist, albeit within a narrow range, which should continue to support the dollar. For example, the European Central Bank is expected to keep its rates relatively stable, while the Bank of Japan is expected to implement rate hikes, although these will still leave a significant differential in favor of the dollar.
The global economic outlook plays a crucial role in the dollar's outlook. The eurozone, in particular, faces significant economic challenges, including weak export demand driven by persistent weakness in the Chinese economy. This could further weigh on the euro, thus providing additional support to the US dollar.
Moreover, although the US economy is expected to slow, it is projected to perform better than many of its global peers. This relative economic strength, combined with the Fed's caution regarding rate cuts, will likely prevent a sharp decline in the value of the dollar.
The index, which measures the dollar's value against a basket of six major currencies, has remained above its historical averages since the start of the rate hikes. “Our view now is for the dollar to strengthen less and remain close to, if not slightly above, its recent range of values,” the analysts said.
According to Wells Fargo, even with the upcoming rate cuts, the dollar is not expected to retreat significantly from its current levels. The dollar index’s resilience reflects both interest rate differentials and broader global economic uncertainties that will likely keep demand for the dollar as a safe haven currency strong.
Analysts continue to express a preference for U.S. equities and fixed income over international or emerging market assets, in part due to the expected strength of the dollar. Sustained dollar strength could affect global markets, making U.S. investments relatively more attractive.
For investors, this outlook suggests that the dollar’s position as a global leader will remain intact even if the Federal Reserve changes its monetary policy stance. This is expected to provide continued support for US assets, reinforcing the strategic allocation towards domestic markets.
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