USD can strengthen further against G10 and emerging market currencies – Wells Fargo

Analysts at Wells Fargo continue to believe that the US dollar can strengthen against G10 and emerging market currencies. They consider the aggressive tightening from the Federal Reserve, safe haven capital flows as well as markets that are mispriced for interest rate hikes abroad should all result in a stronger greenback going forward.

Key Quotes: 

“A hawkish Federal Reserve has boosted the US dollar against most G10 and emerging market currencies year to date, and we believe this trend is likely to continue. Given our view that the Fed is likely to tighten policy aggressively, we believe capital flows should revert back toward the United States.”

“As higher yields attract capital back to the U.S., the dollar should benefit and strengthen against G10 and developing currencies going forward. We believe emerging market currencies are the most vulnerable against this backdrop, especially as political risks rise and central banks across the developing world may be running out of space to lift interest rates.”

“As far as the G10 currencies, we believe financial markets may be priced for too much tightening by many foreign central banks. As markets adjust to a more gradual pace of tightening abroad, G10 currencies should weaken and the U.S. dollar should get a tailwind.”