[Outlook-in-Five] Twists and Turns of the Greenback

The road to a weaker US dollar will not be smooth. Our medium-term forecast remains USD bearish, as we expect the US recession to unfold by early next year, forcing the Fed to turn dovish. Tune in to our latest podcast with our Bank of Singapore currency and commodities strategist, Sim Moh Siong, as he shares the latest outlook for the US dollar, and what investors can expect over the next few months . ************************************ [ Transcript of podcast ] The road to a weaker US dollar will not be smooth. Our medium-term forecasts remain USD bearish, as we expect US recession to unfold by early next year, forcing the Fed to turn dovish. But for the time being, the USD has found temporary support on three fronts... First, when there is an increasing probability of higher rates in US, the greenback tends to do well. Recent rise in US Treasury yields happened alongside recession calls getting push back amid resilient US data and incremental optimism on a debt ceiling deal. Markets are recognizing that the Fed may not have as much room to ease as was priced just earlier this month. A Fed pause in June remains our baseline. But what the US taught us is that pausing is hard when growth is still resilient and inflation still sticky. Investors appear to be anticipating another 25bp hike by the July FOMC meeting. Reports suggesting that the debt ceiling drama is inching toward a compromise agreement are good news even as legislative passage is not assured. A debt ceiling resolution could benefit the greenback to the detriment of other safe havens like gold. The resolution could also bring a new form of tightening given Treasury’s need to replenish cash in the Treasury General Account via a surge in T-bill supply. The debt ceiling stand-off has left the Treasury's cash balance uncomfortably low. Second, for the US dollar to go down, the Euro and Chinese Yuan will have to go up. It could be tough for the Euro and Chinese Yuan to go up for the time being as the soft April China data fueled concerns over China’s growth and the potential macro passthrough to European growth. Credit issues have resurfaced in China. Stress in the property sector has returned and local governments are warning about their debt servicing burdens as fiscal revenues have dropped. Overall, the slow-down in the US is slower than expected, while the data in both China and Europe has been disappointing. China data and US non-farm payrolls this week will send critical signals on some of the pillars for this trend. A softer PMI in China would weigh on the Chinese yuan and spill over to other currencies. Third, artificial intelligence or AI may continue to remain a kicker. Strong results for secular AI-linked trends could benefit the USD given that AI is mostly a US mega large cap equity theme. It is still early days but growing positive correlation between the greenback and AI proxies is worth tracking. Big picture, we still like US dollar lower over the next 6 to 12 months. However, we stay neutral on the greenback and defensive overall in the near term.