Investing.com – The US dollar has had a rough summer so far, and Capital Economics sees more negative impacts in the coming years, citing unfavorable interest rate differentials and continued robust risk appetite.
The Dollar Index, which tracks the greenback against a basket of six other currencies, has weakened about 4% since July as weaker-than-expected activity and inflation data prompted markets to reassess the path for interest rates in the U.S. and elsewhere assess.
“With the Fed finally beginning to ease policy and a soft landing still looking the most likely outcome for the US economy, we believe unfavorable interest rate differentials and continued robust risk appetite will lead to some further US dollar weakness in the next few years. of years,” Capital Economics analysts said in an Aug. 21 note.
The index is at its lowest level since late December 2023, but is still quite strong over the long term. With Fed rate cuts just around the corner, the key question is whether this means the dollar’s recent weakness will continue for a long time.
The seven cycles of monetary easing since the 1970s show that the dollar strengthened for at least a year after the fed funds rate spiked five times after a spike in short-term rates – although in three of those cases the dollar fell significantly later.
Only in two episodes has there been a spike in the fed funds rate followed by a decline in the dollar. The main reason for this pattern is that Fed easing has mostly occurred in the context of a weaker global economy.
Capital Economics thinks the Fed will cut rates by more than most of its peers, meaning short-term interest rate differentials against the US will continue to shift.
“That suggests the dollar will weaken somewhat further,” Capital Economics added.
