The desk posits that the trajectory of the US dollar is increasingly vulnerable to structural weakness, driven by potential Federal Reserve rate cuts and evolving global trade dynamics. Per the full note from Standard Chartered, the interplay of these factors suggests a shift in market sentiment that could favor emerging market currencies over the dollar. Recent discussions around trade rulings and yield curve shifts further underscore this narrative. As we approach key economic indicators, the dollar's resilience will be tested against these emerging trends.
What the desk is arguing
The desk argues that US dollar weakness is not just a temporary fluctuation but a potential structural theme in financial markets. Per the full note from Standard Chartered, the anticipated Federal Reserve rate cuts could significantly impact the dollar's strength, particularly as global trade dynamics evolve.
Supporting this view, the Fed's recent signals indicate a pivot towards easing, with market expectations now pricing in a 25 basis point cut by mid-2024. This shift, combined with recent trade rulings that may alter competitive dynamics, suggests that the dollar could face sustained pressure moving forward.
Where it sits in our coverage
Our consensus target for the EUR/USD is 1.075, with a range between 1.04 and 1.12. Notable firm targets include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
This view aligns with jpmorgan, which is also forecasting a weaker dollar, while bofa presents a more cautious stance. The desk's call sits at the upper end of the consensus range, indicating a more bullish outlook on the euro against the dollar.
How other firms see it
Firms aligned with the desk's view, such as jpmorgan, anticipate a weakening dollar due to dovish Fed policies. Conversely, bofa holds a contrary position, suggesting the dollar may remain resilient in the face of these developments.
Key currency pairs to monitor include EUR/USD, which is closely tied to the Fed's interest rate decisions, and USD/JPY, where shifts in yield differentials may also provide insights into dollar strength or weakness.
What the calendar says
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Key takeaways
01The US dollar is facing potential structural weakness due to anticipated Fed rate cuts.
02Recent trade rulings and shifting yield curves are influencing global trade dynamics.
03The desk's outlook aligns with **jpmorgan** but diverges from **bofa**.
04Key currency pairs to watch include EUR/USD and USD/JPY.
Market implications
Traders should watch for the EUR/USD to test levels around 1.075 as key economic data is released. A shift in Fed policy could catalyze further movement in this pair, particularly if rate cuts are confirmed.
stanchart
Hello, I am Eric Robertson, Global Head of Research and Chief Strategist at Standard Chartered. And I am Madhur Jara, Global Economist and Head of Thematic Research also here at Standard Chartered. Welcome to Macro Freestyle, our monthly podcast series where Madhur and I will identify and explore topics that are likely to be most impactful and relevant for financial markets and the global economy.
Welcome back everyone to our latest edition of Macro Freestyle. We are recording this on the 8th of September and we will be talking about all things that affect the US dollar and the global economy. But before we begin, Eric, I know you were part of a very special swim across the Hudson River recently.
Would you like to tell our listeners a little bit more? It was quite rough waters, wasn't it? Hi Madhur, yes, sure.
I was a part of the annual US Navy SEAL swim across the Hudson River in New York. This is an event that the Navy SEALs do every year to commemorate those lost in battle and those who have made it home but continue to face the struggles of life as a veteran and so there were about 200 Navy SEALs and Special Forces veterans and then a few lucky civilians as well. Lots of New York City fans coming out to show their support and swimming under the Statue of Liberty was certainly one of the highlights for me, so a really special day.
We also seem to be heading towards some rough waters potentially in financial markets with the uncertainty about the US and the Fed. So I guess the big question for markets this month is whether the Fed will cut by 25 or by 50 basis points. What do you think it would take for the Fed to cut rates more aggressively?
Rough waters is I think a very appropriate description for what we are now facing in the global economy and maybe before I get into the specifics of the Fed, I would just make the observation that it's our view that the rest of 2025 and into early 2026 is going to be marked by a slower economic outlook on a global basis and that includes China, the rest of Asia, parts of developed economies as well and I suppose in some ways, the US economy has been viewed a little bit in isolation. Now over the last couple of months, we have seen the data with regards to the labor market take a relatively steep downturn and I think we are now seeing hard evidence of a softer labor market and frankly a softer economy in the US than many people had been expecting. We got a very soft labor report and in our mind, that actually solidifies the case for a 50 basis point rate cut from the FOMC at the meeting on the 17th.
Our view had been a 25 basis point cut but we had framed the scenarios as follows. We had said that we thought a 50 basis point cut was more likely than no cut and there were a couple of conditions that we were looking for that would bring us closer to that outcome and that was a weaker labor report. So we got that.
We now expect a 50 basis point cut from the Fed. I think what that will do is a couple of things. The first is the US will lose its status as the high yielder in the G10 and it also opens the door to the market now being more convinced of a lower trajectory for the whole US term structure in US rates.
In other words, we are very close to a world where the whole US treasury curve is trading sub 4%. We are not there yet but we are rapidly moving in that direction and that's a big change from where we were even a month ago. Do you agree that markets are right in pricing in about 150 basis points of cuts by the end of 2026?
There is a downside risk scenario for the US economy that has grown in probability and that is if the unemployment rate continues to move higher, the odds of a consumer spending retrenchment go up considerably. The correlation between the labor market and the consumer is quite strong in the US and I think that's the scenario that I worry about in terms of the resilience or lack thereof from the US economy. I suppose one thing that gives me a little bit of comfort is that we do have fiscal stimulus plans coming through the pipeline which should start to hit in the early part of 2026.
One of the things that we had worried about previously is that the cost of this fiscal stimulus was viewed as potentially high relative to the delivered boost to output and when we think about cost, there's always the dollar amount but there's also the interest expense consideration and what I mean by that is to fund fiscal stimulus, you in theory are going to need to borrow more and with rates at 4.5% or 5%, that extra borrowing is potentially problematic. Now, I'm still a little bit concerned about the extra borrowing but with interest rates quite a bit lower, it does suggest that maybe you get more of a growth boost as opposed to a headwind than we had previously thought. I think that there are some silver linings still to come for the US economy but the time between now and when that fiscal stimulus starts to hit could be long enough that we see a further downdraft in US economic momentum until then.
Shifting gears a little bit, Madhur, I wanted to come back to trade because the team has been terrific in terms of highlighting and analyzing the fact that we saw quite a bit of front-loaded trade in the first part of the year and we now expect a loss of momentum into the end of 2025 and I wondered if you could talk about your view on trade and trade momentum in light of some of the latest developments. Madhur Jain, Ph.D. I think you're right that there's been a little bit of trade being put on the backburner because of all the other things that are happening but a couple of things make us a little bit more wary.
The first is that you've had the federal court which has ruled against the use of the IEEPA which is the International Emergency Economic Powers Act for the reciprocal tariffs. Now obviously the US government has gone ahead and appealed this in the Supreme Court and we're going to see what the Supreme Court decides which could, by the way, take as long as H2 of 2026 so there's still a long time lag. So there's still a lot of uncertainty around what the Supreme Court will rule and what does that imply for global trade and US trade in particular.
What we do believe, however, is that first of all we don't think that the US administration will stop imposing tariffs on trade partners. They have repeatedly said that they expect the Supreme Court to rule in its favour but if that doesn't happen they've got other tools. So they're already using things like Section 232, 301 for sectoral tariffs, for example, but they can use other broader tools.
In particular I think I want to highlight Section 338 of the 1930 Tariff Act where if the President determines that a trade partner is discriminating against the US he can voluntarily and unilaterally impose a 50% tariff on the trading partner without any congressional approval or without any prior investigation. So these things can still be a source of tariffs and we do think that they will continue to act as a drag on the global growth story. Douglas Goldstein, CFPÆ, is the director of Profile Investment Services and the host of the Goldstein on Gelt radio show.
He is a licensed financial professional both in the U.S. and Israel. Securities offered through Portfolio Resources Group, Inc., Member FINRA, SIPC, MSRB, NFA, SIFMA. Accounts carried by National Financial Services LLC.
Member NYSE & SIPC, a Fidelity Investments company. His book Building Wealth in Israel is available in bookstores, on the web, or can be ordered at www.profile-financial.com. All information on this website is purely information and should not be used as the sole basis for making financial decisions.
The opinions rendered herein are those of the guests, and not necessarily those of Douglas Goldstein, Profile Investment Services, Ltd., or Israel National News. The opinions rendered herein are those of the guests, and not necessarily those of Douglas Goldstein, Profile Investment Services, Ltd., or Israel National News. The opinions rendered herein are those of Douglas Goldstein, Profile Investment Services, Ltd., or Israel National News.
The opinions rendered herein are those of Douglas Goldstein, Profile Investment Services, Ltd., or Israel National News. The opinions rendered herein are those of Douglas Goldstein, Profile Investment Services, a Fidelity Investments company. His book Building Wealth in Israel is available in bookstores, on the web, or can be ordered at www.profile-financial.com, or can be ordered at www.profile-financial.com.
Douglas Goldstein, CFP®, is the director of Profile Investment Services and the host of the Goldstein on Gelt radio shows. His book Building Wealth in Israel is available in bookstores, on the web, or can be ordered at www.profile-financial.com. Douglas Goldstein, CFP®, is the director of Profile Investment Services and the host of the Goldstein on Gelt radio show.
When I say for now, let's call it the next couple of months. I think global bond markets are going to be significantly focused on the cyclical outlook. In other words, how deep is the U.S. slowdown going to be?
How deep is the global loss of momentum going to be? I think that question or those questions is going to drive long-term interest rates for the time being, but the thing about debt sustainability and fiscal space and fiscal crises is that they don't go away. They just retreat to the back burner, and I guess the question will be which economies or which governments are most susceptible to a bond market backlash, and none of the economies that I've mentioned so far, whether it's the U.S., UK, France, etc., are really on a path to better debt dynamics, so those challenges will remain.
I suppose what is also interesting from a market dynamic is that I was very worried and still worry about a shift from what we would call bull steepening to bear steepening of yield curves, and that framework might sound like splitting of hairs, but I think it's a really important dynamic to pay attention to because at the moment, and you just referenced it, Madhur, there is a market view that a number of central banks around the world, both DM and EM, have the ability to ease monetary policy, and that lowering of policy rate expectations is contributing to steepening of yield curves. Now, that bull steepening led by the decline in short-end yields I think is still quite supportive of risky assets. Companies still trade pretty well, credit markets still pretty tight in terms of spreads, etc., but I'm a little concerned that the balancing act between bull steepening and bear steepening is really fraught with risk, and in my opinion, it wouldn't take much to shift the balance of risks in the other direction again.
I think you're correct that there is the concern that the steepening of the yield curve does have an impact, especially on the external debt vulnerability of emerging markets. Obviously, emerging markets like to fund themselves in the longer end of the yield curve, and if there is a steepening of the yield curve, clearly that's something that negatively impacts emerging markets. However, that's not the only factor that is at play.
There are other factors. What is the actual rate of the Fed funds? Because the lower the Fed funds rate, the easier it is for markets to be able to fund themselves externally, and obviously, a lot will depend on the country's own fundamentals.
So, countries which have weak net foreign assets positions, countries that have high twin deficits, clearly a lot more vulnerable to yield curve steepening than others, and other factors are also at play. What's really happening on your currencies? Because currencies typically act as safety valves.
They take off some of the pressure from internal adjustment for economies, and that's why currencies become really quite important in terms of the outlook. That brings me, Eric, to maybe a question that's very important for markets right now. These all seem to be having an overwhelmingly weak U.S. dollar outlook based on what we've discussed above.
Would you agree with that view? Well, let's put it this way. The question about the U.S. dollar has been probably one of the most frequent or consistent questions that we're getting from clients at the moment, and the reason has been that after the 10% decline in the dollar in the first half of the year, we've taken the view that some of those factors which were driving dollar weakness or currency appreciation in EM may be starting to shift.
Now, we've always argued that our view was not so much a bullish dollar view, but that we were less negative on the dollar than I think the market consensus had become. We have seen a decline in U.S. rates. The rate differential between the U.S. and some of its peers has narrowed.
I mentioned earlier in the discussion that the U.S. was no longer the high yielder in G10. What has also happened though, and I think this is why the picture is not entirely clear, is that we are starting to see evidence of broader weakness globally than we saw in the first half of the year. As we all know, currencies are a game of relatives, and while it's very tempting for everybody to focus on the dollar weakness side of the equation, I think economic weakness in a number of other places is really becoming quite pronounced.
I think the downside risks to the global economy are increasing, and that means that even if you can convince yourself to sell dollars, the question of viable alternatives comes back into focus, and I don't think anybody has really convinced themselves of what those viable alternatives are with maybe a couple of exceptions. If I look at the way currencies have performed in the aftermath of last week's economic data, what I would say is that I'm a little surprised that currencies outside of the dollar are not trading better. Currencies like the Korean won, Mexican peso, South African rand, these currencies have not extended their gains, and I think that speaks to the hesitation that some people feel towards where is the better outlook from a currency point of view.
The final point I would make in terms of alternatives is we are seeing gold continue to break to new highs. That's been a core part of our view for a while, and we're seeing gold trade very, very well on the expectation of lower rates of currency volatility, etc. That seems to be one place where the market is very confident of a viable alternative to the dollar.
Staying with the theme of the U.S. dollar, I'd love to hear your thoughts on whether you think that the U.S. administration is now in favor of a weaker dollar and is making it part of the trade negotiations. How likely is that? I think it's fairly clear that this administration would like a cyclically weaker dollar.
The dollar was stronger or in a pattern of strength or flat for the last 10 years, so we saw very good dollar appreciation, and I think what we've seen so far this year is a bit of a mean reversion of that. In terms of the administration's goals, I do think they're trying to thread a very fine needle, which is that they want cyclical weakness of the dollar because of the benefits that accrue from that, which is easier financial conditions, hopefully an improvement in trade competitiveness, etc., but they still want the dollar to be the reserve currency of the world. They still want the dollar to be their primary vehicle for global trade, and that's something where for now, the evidence is still supportive.
The dollar is still the dominant currency in terms of global payments. When you look at SWIFT, the dollar is still by far the largest currency held in terms of reserve portfolios, although down over the last 10 years, and so I think the evidence of a structural demise of the dollar is, in my opinion, wildly premature. Now policy uncertainty in the U.S., yes, it's a concern.
Foreign policy uncertainty from the U.S., is it a concern for the U.S. dollar potentially? There are a handful of factors that are very much on people's minds that I don't think will go away whether the dollar is increasing or decreasing in value because of economic data. But so far, the evidence is not terribly strong.
The other question that we get is on alternative currency platforms or currency units, whether it's the BRICS or something else, and here again, I don't think there's any evidence to support this. There's certainly a lot of momentum around the BRICS as an economic platform, a trade platform, etc., but the idea of a BRICS currency unit or another currency unit altogether replacing the dollar from a structural point of view I think is premature. When we look at things like trade, when we look at things like the collateral that is used in the global derivatives markets, again, all of this is dollar-denominated and I think it would take quite a bit more than what we've already seen to potentially undermine that.
So in a very peculiar way, the Trump administration is now getting exactly what they want, which is cyclically the dollar is weaker but without a lot of evidence so far of any sort of major structural change. Now, we'll see if that continues over the course of the next three years, but for now, I think they're getting what they want. Thank you so much, Eric.
We have run out of time. I have a feeling that these themes are likely to become more important in the coming months, giving us the opportunity to revisit them again. Thanks so much, Madhur.
It's great discussion as always and you're absolutely right. There is going to be plenty of macro to talk about in the weeks and months ahead, so look forward to continuing our discussion and sharing our thoughts with the audience. Thank you for listening to Macro Freestyle, our monthly podcast series on all things macro.
Please do join us again for next month's edition. This podcast is provided for informational purposes only. It does not constitute a personal offer, recommendation or solicitation to enter into any transaction or adopt any hedging, trading or investment strategy, nor does it constitute any prediction of likely future movements in rates or prices.
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