Investing.com — Despite the recent weakness, BCA Research analysts said in a note Monday that the economy remains resilient and is expected to recover in the coming months.
The global economic landscape, characterized by a downturn in the manufacturing sector and increasing caution in financial markets, is paving the way for the dollar’s recovery.
The dollar may have fallen, but according to BCA Research, it is far from out of the game.
In 2024, global financial markets have seen the US dollar lose some ground as uncertainty clouded the broader economic environment.
Global production, which had briefly stabilized earlier this year, has entered a new phase of contraction. This decline is accompanied by weakness in oil prices and prices, key indicators of global economic activity.
In addition, several segments of global risk assets have failed to rise above their previous highs, pointing to deteriorating global growth conditions.
Moreover, liquidity conditions are tightening. BCA Research notes that global dollar liquidity, defined as the sum of the U.S. monetary base and securities held by the Federal Reserve for foreign officials and international accounts, is declining.
This factor has contributed to the current decline in the dollar’s strength. However, this very dynamic of reduced liquidity could ultimately prove to be a boon for the dollar.
“In particular, tighter global liquidity in the USD – calculated as the sum of the US monetary base and securities held at the Fed for foreign officials and international accounts – is generally positive for the dollar,” the analysts said.
This tightening is linked to global production, which is closely correlated with dollar movements. As the global economy contracts, the US dollar often behaves countercyclically, rising in value as riskier assets suffer losses.
The current situation bears some similarity to the bear market of the early 2000s. In the first phase of the 2000-2002 bear market, the US dollar appreciated while global stock markets, including emerging market stocks, sold off.
If this pattern repeats, the dollar could follow a similar trajectory in the coming months and gain strength during the early stages of the bear market.
One of the main reasons why BCA Research remains positive on the US dollar is the structure of the global financial system.
The US dollar remains the dominant global reserve currency, with the majority of international transactions settled in dollars.
Furthermore, during times of economic stress, investors often seek the safety of U.S. assets, which further support the dollar.
“The broad trade-weighted US dollar has not broken below the bottom of its rising channel so far,” the analysts said.
The currency continues to benefit from its role as a safe haven, which should support demand, especially as economic uncertainties persist globally.
Emerging market stocks and currencies are highly correlated with global growth. BCA indicates that a renewed contraction in global output is likely to lead to a downturn in emerging market equities and currencies.
A stronger U.S. dollar could add to these pressures by making it more expensive for emerging markets to service their dollar-denominated debt, further hampering their growth prospects.
