SSGA: US dollar looks oversold

SSGA: US dollar looks oversold

January 24, 2024

Currency
Geld dollar.jpg

The USD erased its gains since mid-July in late 2023 on speculations that the US Fed might pivot to policy easing in 2024. With State Street Global Advisor’s forecasts for below-trend global growth in 2024, recent market trends seem at risk of reversal over coming months. The asset manager maintains a neutral view on the euro against the G10 average and a negative view against the US dollar and the yen.

In the near term, the bearish dollar story appears a bit ahead of itself, Aaron Hurd, Senior Portfolio Manager in State Street Global Advisors’ currency team, writes in his latest commentary on the currency market. The Goldilocks scenario of lower yields alongside resilient growth is already well priced. Any modestly positive or negative US economic surprise is likely to trigger a temporary US dollar rebound.

'Given the struggles in commodity markets and G10 growth outside the US, we see downside risks for higher-beta currencies such as the Australian, New Zealand, and Canadian dollars, as well as the Scandinavian currencies. However, both the Norwegian krone and Swedish krona are extremely cheap from a longer-term perspective. While the yen may struggle to extend its gains against the US dollar in the near term, we remain broadly positive relative to the G10 average, as global disinflation and weaker growth contribute to lower yields, and add uncertainty to the medium-term equity outlook,' Aaron Hurd explains.

Euro - softening growth and lower inflation suprises weigh

'We maintain a neutral view on the euro against the G10 average and a negative view against the US dollar and the yen. While the European Central Bank (ECB) may not have discussed rate cuts at its December meeting, rapid disinflation and near recessionary conditions suggest a strong case for rate cuts over the course of 2024. This is a challenging environment for the euro as the combination of high European Union (EU) recession risk and softening ECB policy outlook is likely to weigh on the currency. However, heightened global uncertainty and equity volatility over the next few months may help support the euro against higher-beta currencies, as will the ongoing weakness in commodity markets,' Aaron Hurd says.

USD - Oversold, could bounce on positive or negative news

'We have long held the view that the US dollar is likely to fall at least 10%–15% over the coming years, but is currently in a noisy transition period from a bull to a bear market, a protracted range-trading environment. We strongly recommend investors with a horizon of more than two years to position for a lower US dollar. However, a sustained US dollar bear market does not appear imminent. The world is in a fragile place, while the US grows well above trend, offers high yields, and the US dollar tends to provide a good hedge for risky assets if we slide into recession. Consequently, we believe that any modestly positive or negative US economic surprise is likely to trigger a US dollar rebound into Q1 2024,' Aaron Hurd states.

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