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 price action quite poor
The desk highlights a period of notable weakness in the US dollar despite supportive fundamentals such as elevated energy prices and firm short-dated US interest rates. Per the full note from ING, the subpar performance of the dollar is attributed to a combination of low-volatility investment flows away from the dollar and high volatility in USD/JPY as macro hedge funds position for a potential move below 150. With a Friday US CPI release expected to frame the Fed's next steps, the current softness in the dollar raises questions about market positioning amidst stable global equity indexes and expectations for a forthcoming 25bp rate hike from the Fed. This ongoing situation is in contrast to the increasingly bullish sentiment displayed towards both the euro and the pound, as indicated by recent consensus forecasts.
Global FX: Bullish beta, bullish USD reinforced
The desk advocates for a bullish outlook on the USD, underpinned by recent G4 central bank activities that signal a firm commitment to supportive monetary policies, particularly from the Federal Reserve. Per the full note from J.P. Morgan, substantial shifts in market positioning towards USD have been observed, suggesting increased investor confidence in its strength. With the ongoing discussions around interest rate adjustments and hints of policy normalization in the G4 economies, the USD could find itself bolstered further in the coming weeks. Despite the lack of high-impact events in the upcoming calendar, the current market sentiment leans heavily towards a bullish dollar narrative.