Despite expectations of a significant rate cut by the Federal Reserve in 2024 and 2025, analysts at Wells Fargo Investment Institute expect the US dollar to remain high.
Analysts cited the reasons behind the forecast in a note dated Monday, focusing on interest rate differentials, global economic conditions, and the performance of the US dollar compared to other major currencies.
Interest rate differentials have been a major factor driving the strength of the US dollar over the past few years. Since the Federal Reserve began its aggressive rate hike campaign in March 2022, the US dollar has consistently traded above its historical averages.
With the Federal Reserve preparing to start cutting interest rates, it might seem reasonable to expect a significant decline in the value of the dollar.
However, analysts argue that the dollar is likely to remain within its recent trading range, largely because other major central banks, including the European Central Bank, are also expected to cut interest rates.
The interest rate differential between the US and other advanced economies is expected to remain narrow, albeit by a small margin, which should continue to support the dollar. The European Central Bank, for example, is expected to keep interest rates relatively steady, while the Bank of Japan is expected to hike rates, although these increases will leave a significant differential in favour of the dollar.
The global economic landscape plays a crucial role in determining the dollar’s outlook. The eurozone in particular is facing significant economic challenges, including slowing export demand due to continued weakness in the Chinese economy. This could weigh on the euro, and thus provide additional support to the US dollar.
Moreover, although the U.S. economy is expected to slow, it is expected to outperform many of its global peers. This relative economic strength, coupled with the Fed’s cautious approach to cutting interest rates, is likely to prevent a sharp decline in the value of the dollar.
The dollar index, which measures the greenback against a basket of six major currencies, has remained above historical averages since the start of the rate hikes. “Our expectation now is for the dollar to weaken and remain close to its recent range of values if not slightly higher,” analysts said.
Even with interest rate cuts in the near future, the dollar is not expected to fall significantly from its current levels, according to Wells Fargo. The resilience of the dollar index reflects both interest rate differentials and broader global economic uncertainty, which is likely to keep demand for the dollar strong as a safe-haven currency.
Analysts continue to favor U.S. equities and fixed income over international or emerging assets, in part because of the expected strength of the dollar. A sustained strengthening of the dollar could weigh on global markets, making U.S. investments relatively more attractive.
For investors, this expectation suggests that the dollar’s status as a global leader will remain intact, even as the Fed changes its stance on monetary policy. This is expected to provide continued support for US assets, reinforcing strategic allocations towards domestic markets.