Daragh Maher, HSBC's head of U.S. foreign exchange strategy, said the dollar's strength will prove resilient even if the Federal Reserve starts cutting interest rates later this year.
He said in an interview on Thursday that he expects the dollar to remain near its current level through the end of 2025.
That’s because HSBC expects the U.S. economy to continue outperforming its global peers, with the yield advantage on U.S. Treasuries set to persist even if the Federal Reserve cuts borrowing costs by the end of the year as expected.
Before his speech, a CPI report showed broad-based U.S. inflation cooled last month, sending Treasury yields and the dollar lower as traders bet the Federal Reserve will cut interest rates at least twice this year.
“This theme of ‘American exceptionalism’ still looks like it’s sticking with the dollar,” Maher said. “The bigger unknown is — can the rest of the world catch up?”
He predicts that the U.S. dollar index (DXY) will reach 105 by the end of 2025, compared to around 104.5 now. Maher also expects the dollar to rise slightly against the euro and pound in the coming months.
On Thursday, the dollar index fell about 0.6%, its biggest one-day drop in about a month, trimming the index’s gains for 2024 to around 2%. Since the beginning of the year, the Federal Reserve’s “higher for longer” signals have supported the dollar as other central banks begin to ease policy.
The performance of the US dollar this year has been primarily influenced by interest rate expectations. The chart below shows the weighted average of the US dollar exchange rate against other major currencies and the 5-year Treasury yield spread between them.
This can also be seen in the dollar's returns relative to other major currencies. USD/JPY has risen strongly this year as the interest rate differential between the U.S. and Japan has widened, while USD/GBP has fallen as its interest rate differential has changed minimally.
Karen Reichgott Fishman, senior currency strategist at Goldman Sachs, noted that the correlation between stocks and bonds has been mostly positive in 21 of 27 weeks this year, which tends to coincide with dollar moves. Typically, when stocks and bonds move higher at the same time, the dollar struggles. "This makes the dollar's new highs this year all the more surprising and reinforces the scope for tactical selling," she said.
Reichgott Fishman added that in an environment where U.S. Treasury yields fall and stocks rise, the dollar typically weakens against most currencies and is a good choice for funding emerging market carry trades.
To be sure, however, she stressed that the dollar bull run could reappear in the second half of the year. Ahead of the election, the increased likelihood of U.S. tariffs could pose upside risks to the dollar, especially against Asian currencies.
Article forwarded from: Jinshi Data
