Dollar bulls vs bears: Bank of America weighs in
Analysts at Bank of America assessed the bull and bear cases for the US dollar in a note Thursday, saying that FX conviction is low at present.
The firm explains that the USD began the year on the back foot as expectations for Fed easing in Q1 mounted. However, "strong data and a more balanced Fed message have upended that." They feel this has left the market thirsty for a fresh catalyst.
"The USD has recently lost momentum as market pricing of the fed funds path is much closer to the Fed's guidance," says BofA.
In its bearish case for the USD, BofA notes that the market consensus sees the USD trading lower this year.
"Despite recent upside surprises, US inflation readings are softening, particularly when looking at recent readings of the more policy-relevant core PCE and factoring in possible January distortions," says the firm. "Fed policy is relatively too restrictive for the impending inflationary environment, and a real-rate convergence is on the horizon, bringing the USD lower with it."
On the other hand, the firm notes dollar bulls have "clung to the so-called 'US exceptionalism' narrative and see broad measures of relative growth outperformance as a cornerstone to capital seeking the US."
"Despite disinflation trends, stickiness in the more core services component should keep the Fed from pivoting early, as it has widely communicated," states the bank. "Several risk factors (US election, geopolitics, hard landing risks) skew USD positive, while CRE/reginal bank flare-ups (likely USD negative) have not been shown to be widespread at present."
Overall, BofA expects inflation (versus growth) to be a marginally bigger determinant of Fed policy amid a resilient US economy. Even so, they note the "interpretation is in the eye of the beholder." The firm maintained its bearish USD forecasts for the year.
By Sam Boughedda