CIO expects rate differentials between the US dollar and other currencies to narrow, and the dollar’s downtrend to continue in the months ahead. (ddp)

But we think the US dollar's rebound will be short-lived given expensive valuation, a twin US deficit, and a likely end to US rate rises. We are most preferred on the euro.


The US currency has recently bounced from July lows.

  • The US Dollar Index (DXY) has risen 3.5% from a July 2023 low. The broad measure of US dollar strength is flat for 2023, and 10.9%higher over three years
  • It has been torn between stronger-than-expected US growth indicators and moderating US inflation, potentially pointing to the end of Fed rate hikes.
  • The direction of the US dollar also depends on other central banks, such as the European Central Bank, which may hike rates further.

Dollar strength looks unlikely to last, given falling inflation and weak fundamentals.

  • US inflation will likely moderate quicker than elsewhere, especially the Eurozone. We think the Fed is closer than the European Central Bank in ending its hike cycle.
  • Fundamental long-term factors remain a burden for the US currency.
  • In our view, these include the dollar’s expensive valuation, the twin fiscal and current account deficits, the ratings outlook, and the high allocation of funds in the US.

So we advise investors to continue to position for a weaker US dollar.

  • We have a least preferred view on the US dollar, and a most preferred view on the euro. We move neutral on the yen given few near-term catalysts for a recovery against the USD.
  • Investors can also consider various strategies to enhance yield by utilizing volatility in the options market, subject to their risk appetite and long-term goals. We especially like strategies using the euro, Norwegian krone, Japanese yen, and Australian dollar.

Did you Know ?

  • The Federal Reserve hiked by 25 basis points at its policy meeting in July, taking rates to the highest level in 22 years and marking its 11th rate increase in its last 12 meetings.
  • The Bank of Japan gave further indications in July that it is backing away from its ultra-easy monetary policy by unexpectedly adjusting its yield-curve control program. Despite holding the 10-year JGB yield ceiling at 0.5%, policymakers said they will aim to control yields “flexibly” and offer to buy 10-year bonds at 1% every business day.

Investment view

We are least preferred on the US dollar, and most preferred on the euro. We also expect the British pound and Swiss franc to appreciate. Investors can consider various strategies to enhance yield by utilizing volatility in the options market.


Main contributors - Christopher Swann, Matthew Carter


Original report - Can the dollar's rebound last ?, 18 August 2023.