A top currency analyst from Deutsche Bank, George Saravelos, boldly declares that it’s the right time to sell the U.S. dollar. In a recent note to clients, Saravelos expresses his belief that the dollar will weaken against major currencies such as the euro, Japanese yen, and British pound. Updated forecasts in the note indicate that this weakening trend will continue through 2024, with possible further weakness or stagnation in 2025.
Initially maintaining a bullish call for the euro in 2023, Saravelos shifted his stance in May and became “tactically” bullish on the greenback. However, Wednesday’s Consumer Price Index (CPI) report proved to be the evidence he was waiting for. With U.S. inflation reaching its lowest level since 2021, Saravelos suggests that the U.S. dollar is likely to head lower. He believes that the Federal Reserve won’t need to raise interest rates as high or keep them elevated for an extended period.
While his forecast sees the euro rising to $1.15 by year-end, Saravelos states that an advance to $1.20 is entirely possible. As of now, the shared currency is trading at $1.1228.
According to Saravelos, the U.S. dollar is facing a double-whammy of sustainable disinflation and robust economic growth, though not excessively strong. He notes, “First, we feel increasingly confident that the U.S. disinflation process is well underway.”
The Dollar’s Demise and the Stock Market Surge
2022 witnessed a remarkable surge in the value of the US dollar. The Federal Reserve’s aggressive interest-rate hikes, including four consecutive jumbo hikes of 75 basis points, amplified the gap between dollar yields and those of other currencies. This substantial difference tilted the scales in favor of the dollar, prompting international investors to flock towards it as a safe haven amidst fears of an impending recession. Consequently, the ICE U.S. Dollar Index (DXY) soared by a staggering 7.9%, its most impressive yearly performance since 2015, according to FactSet data.
In late September 2022, the dollar index reached an apex, just shy of 115, marking its highest level in over two decades. However, since then, it has been on a downward trajectory. Currently, the dollar index sits at 99.8%, registering a 0.8% decline and extending its losing streak for the sixth consecutive day. This continuous slide marks the dollar’s longest losing streak since September 2021 and takes the index down to its lowest level since April 2022. So far this year, the dollar index has experienced a 3.6% decline.
Interestingly, the dollar’s peak in September of last year coincided with a low point for the stock market. Conversely, the greenback’s latest nadir corresponds to a fresh 15-month high for U.S. stocks. The S&P 500 index recently broke the 4,500 mark for the first time since early April 2022, as investors expressed optimism about an anticipated end to Federal Reserve interest rate hikes this year.
The Disinflation Process and its Impact
According to experts, the disinflation process appears to be relatively benign. They argue that a combination of declining U.S. inflation in conjunction with reasonably stable growth conditions is the most bearish scenario for the dollar. The anticipation of such a scenario, along with the aforementioned factors, has contributed to the dollar’s recent decline.
The gradual decline in the dollar’s value offers both challenges and opportunities for investors and businesses. On one hand, it impacts the competitiveness of U.S. exports, making them more attractive to foreign buyers. On the other hand, it raises the cost of imports, potentially putting pressure on inflation.
As we move forward, it will be interesting to observe how the dollar and stock market continue to respond to changing economic conditions and policy decisions.
