As the Federal Reserve approaches a pivotal point in its tightening cycle, the focus on the US Dollar Outlook sharpens. Barclays analysts suggest that the worst impact on the dollar may soon stabilize. This is due to evolving U.S. monetary policies and global economic conditions.
Recently, market expectations have shifted toward earlier and more substantial Fed rate cuts. This shift results from signs of a slowing U.S. economy and dovish adjustments by the Fed. Consequently, real terminal rates have dropped from about 200 basis points to below 50 basis points.
Most of the dollar's depreciation appears to have already occurred. The US Dollar Index, tracking the dollar against major currencies, has been declining since mid-2023. Yet, the rate of further depreciation is likely to slow as the Fed concludes its tightening phase.
Historically, significant dollar weakness often precedes Fed easing cycles. This pattern is evident as the market anticipates future cuts, leading to current dollar weakness.
Looking ahead, if the U.S. avoids a severe recession, the Fed might implement rate cuts more cautiously. Such a move could stabilize or even strengthen the US Dollar Outlook. In milder economic downturns, the dollar often rebounds when it's clear the Fed is not cutting as aggressively as feared.
Geopolitical tensions and U.S.-China trade uncertainties also significantly influence the dollar. The upcoming U.S. presidential election could introduce new market dynamics, indirectly affecting the dollar.
Barclays forecasts some short-term depreciation but expects only a modest continuation into late 2024. Recovery should follow, driven by a recalibration of market expectations about Fed rate cuts and improved global risk sentiment.
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