19 July 2023
Investment banks are growing increasingly pessimistic about the dollar as they anticipate a soft economic landing, leading to a reduced need for the US Federal Reserve to raise interest rates. Major lenders such as Morgan Stanley, JPMorgan Chase, Goldman Sachs, and HSBC have abandoned their bullish dollar calls or predicted further declines in the currency following last week’s significant drop in US inflation. The US currency hit a 15-month low against a basket of currencies, fueling expectations that the Fed could soon end its monetary tightening campaign without pushing the world’s largest economy into a recession. Analysts at HSBC believe that the signs of global growth improvement and a US soft landing will pave the way for dollar weakness, anticipating a breakout from the tight trading range seen since late 2022. Goldman Sachs analysts also expect a substantial decline, suggesting that the recent move is just the beginning. Morgan Stanley and JPMorgan have adjusted their positions, with the former shifting to a neutral stance and the latter closing its recommended dollar trades. The market sentiment on further rate hikes has weakened, indicating a lower probability for a September rise. Traders are becoming more optimistic that the US economy will avoid a recession, with a majority expecting continued but modest growth. In this environment, the dollar tends to perform poorly compared to scenarios of higher US interest rates or a global recession. The rapid decline of the dollar has surprised some, as it is falling faster than interest rate trends or economic data would suggest, with the euro reaching above $1.12 for the first time since last year’s Russia-Ukraine conflict.