US dollar update – path of least resistance remains to the downside

Given a deteriorating global growth outlook and higher trade tensions, we are reducing our bearish stance on the US dollar. However, we believe that most factors suggest the US dollar continues to face downside risks.

Despite a more dovish Fed, the US dollar has remained strong since the start of the year (as of 28 May, only the Canadian dollar and the Japanese yen had fared better). Weak global economic growth, notably as a result of trade tensions, has favoured the US dollar given its safe-haven status and high carry.

Taking stock of the deterioration in the global growth outlook and higher trade tensions, we are reducing our bearish stance on the US dollar. However, we are of the view that most factors (e.g. growth and interest rate differentials, capital flows, fiscal health and valuations) still suggest the path of least resistance for the US dollar is to the downside.

Our projections for the EUR/USD rate is now USD1.11 in three months, USD1.13 in six months and USD1.15 in 12 months.

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