The bank notes three negative drivers for the USD:
- Lower Yields Environment: A persistent low-yield environment in the US, with the Fed's dovish tone at the Jackson Hole speech reinforcing expectations for rate cuts is a negative environment for the USD as the Dollar’s value typically declines with lower US yields.
US10Y vs DXY
- Relative Disinflation: A new factor weighing on the USD is the relative disinflation in the US compared to other parts of the world, especially Europe. This could lead to divergent monetary policy paths between the Fed and other central banks like the ECB, putting further pressure on the Dollar.
USD vs inflation momentum proxy
- FX Sensitivity to Rates: The USD remains highly sensitive to changes in US Treasury yields. The DXY is likely to decline further if US yields continue to fall. The current forecast is for the UST 10Y yield to drop to 3.5% by year-end, which would translate to an additional 1.4% downside for the USD.