USD: Stage is set for a medium-term depreciation against overseas major currencies - CIBC

Analysts at CIBC, forecast that the US Dollar Index (DXY) will trade around 93.97 in Q4 and around 89.86 during Q2 2019. 

Key Quotes: 

“The stage is set for a medium-term depreciation in the USD against overseas major currencies. Although growth this quarter is set to register an above-trend pace, something that has helped keep DXY elevated in the past month, cracks in the foundation have begun to appear. Consumption has been amplified by tax cuts but rising interest rates are starting to constrain auto purchases and housing market activity. At the same time, the economy is closing in on full employment and barriers to expansion including labor shortages are evident in several industries. 

“Set against the backdrop of a deteriorating fiscal position, the market may be asking for too much in terms of growth next year while understating monetary policy tightening odds in other advanced economies. The market is already fully priced for another two Fed hikes this year, but our
below-consensus growth and Fed forecast for 2019 may have investors looking to other economies next year as interest rates in the Eurozone and UK are set to rise.”

“Progress on NAFTA negotiations could reverse some of the strength seen in the USD that has resulted from protectionism, with progress on talks with other countries compounding that effect over the medium term. At the same time, an elevated US current account deficit that is set to deteriorate further next year as exports lose some steam should contribute to a softer greenback over 2019.”