Global FX: The weak dollar view passes a flow test
At a Glance
The desk asserts that current conditions favor a weakened dollar, corroborated by the dynamics of growth and inflation in the U.S. and supported by positive cross-border USD flows despite recent tactical developments in G10 currencies. Per the full note from J.P. Morgan, the current climate presents challenges for the dollar bolstered by persistent inflationary pressures alongside a dovish turn from the Reserve Bank of New Zealand (RBNZ), which has implications for global risk sentiment. Given that institutional flows are generally favoring assets denominated in currencies that have been more resilient recently, this trend could further drive the dollar's decline. The consensus target among major players suggests continued weakness for the dollar, but the path remains sensitive to upcoming geopolitical shifts and central bank decisions.
Key Takeaways
- 01Weak dollar thesis reinforced by U.S. growth/inflation dynamics.
- 02Dovish RBNZ adds uncertainty to global risk appetite.
- 03Cross-border USD flows remain strong, supporting alternative currencies.
- 04Market sentiment sensitive to further central bank actions.
Full Analysis
What the desk is arguing
The desk frames this as a scenario favoring a weak dollar, influenced by the growth/inflation narrative in the U.S. Per the full note, the current economic landscape highlights inflation pressures that challenge dollar strength, further complicated by dovish stances from key global central banks.
As it stands, U.S. inflation data continues to rise, which complicates Federal Reserve policy expectations while cross-border USD flows remain robust, signaling persistent demand. The dovish surprise from the RBNZ has shifted market sentiments, suggesting central banks are now leaning towards more accommodative policies in the face of economic uncertainties, contributing to downward pressure on the dollar.
Where it sits in our coverage
J.P. Morgan sets a target for the dollar at 1.10 against the euro for March 2026, aligning with their broader strategy amidst these developments. Other firms have varied targets, with some more bearish.
This view from the desk aligns with the spread from 1.04 to 1.10, suggesting that they are sitting at the upper end of expectations for dollar weakness against the euro.
How other firms see it
Firms aligned with this weak dollar perspective include jpmorgan, while bofa represents a more cautious view regarding dollar depreciation. The consensus is notably divided, with some analysts projecting much stronger dollar resilience, particularly in light of potential policy adjustments by the Federal Reserve.
Related observations regarding USD/JPY should be closely monitored as it could reflect sentiments around Federal Reserve monetary policy and the broader geopolitical environment, which would likely drive volatility in the near term.
Market Implications
Watch the USD/EUR level around 1.10 as a critical resistance point; any sustained break below could open up the path for further dollar weakness. Additionally, observe geopolitical developments or sentiment changes leading up to the upcoming Fed meetings, as these could significantly impact dollar positioning.
From the original
This week, our FX Strategists break down the growth/inflation mix in the US and how that’s impacting the dollar, before providing an update on the state of cross-border USD flows and FX hedging. They also provide a recap of recent tactical developments in G10, including the dovis
Related speeches
4 itemsFX Daily: Dollar consolidates recent gains
The desk maintains a cautiously optimistic view on the dollar, anticipating that it will continue to find support on dips amid a backdrop of improved risk asset stability, particularly in the tech sector. Per the full note [source], the current environment is seen as conducive for the dollar, especially ahead of key US pricing data and monetary policy discussions. The upcoming CPI and PPI data releases will be critical in determining market sentiment towards the Federal Reserve's trajectory, particularly following last week's strong labor market indicators. Current positioning shows a consensus building around a more hawkish Fed, indicating potential dollar gains amidst potential for sustained risk asset consolidation.
Global FX: Dollar down after FOMC, MoF intervention
The FX desk interprets the recent downturn in the dollar as a distinct response to the Federal Open Market Committee's (FOMC) latest policy signals, compounded by Japan's latest intervention against a backdrop of stagnant Bank of Japan (BoJ) rates. Per the full note from J.P. Morgan, the dollar's weakness followed signals of a prolonged dovish stance from the Federal Reserve, which is seen as a departure from any potential tightening. This dovish pivot, in conjunction with Japan’s continued FX intervention, has created a confluence of factors driving a bearish sentiment around the dollar, particularly against major currencies like the AUD and GBP. As the situation unfolds, traders should monitor the evolving central bank narratives closely for further indications of policy direction.
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