US Dollar: Faces renewed downside risk – Commerzbank

Commerzbank’s Volkmar Baur notes that the US Dollar (USD) has weakened against the Euro (EUR) as markets steadily scale back expectations for further Federal Reserve (Fed) tightening relative to other G10 central banks. Since December, higher US rate expectations have supported the Dollar, but the recent reversal and Commerzbank’s forecast of three US rate cuts next year point to renewed Dollar downside.

Fed repricing threatens recent Dollar strength

"Since the end of December, the market has revised its expectations for the Fed significantly higher than was the case for the rest of the G10. In December, for example, the market still expected the Fed to cut rates by 60 basis points (bps), while the G10 average forecast called for 10 bps of hikes."

"Over time, however, this gap has gradually closed - particularly since the start of the Iran conflict - and most recently, the market had even anticipated a more substantial interest rate hike in the US."

"All of this has supported the US dollar in recent months and prevented it from depreciating further. However, should the trend of the past two weeks continue - as suggested by our economists’ forecasts, which still anticipate three interest rate cuts in the US next year - the US dollar should once again come under pressure, as we expect."

"If we compare market expectations for the Fed with those for the other G10 central banks (excluding the Nordic countries), it becomes clear that market expectations for the US central bank have been steadily scaled back since the last Fed meeting, whereas this has not been the case for the other developed countries."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)