U.S. Dollar Faces 9% Decline as Analysts Predict Further Weakness

Wall Street analysts have been unanimous in their prediction that the U.S. dollar will continue to weaken. This consensus is driven by a combination of economic factors and policy uncertainties, including interest rate cuts, slowing economic growth, and the trade and tax policies implemented during the tenure of Donald Trump.

Several prominent investment banks have reiterated their bearish outlook on the dollar. Morgan Stanley predicts that by mid-2024, the dollar will reach its lowest level since the onset of the COVID-19 pandemic. Similarly, JPMorgan Chase also holds a bearish stance on the dollar. Goldman Sachs warns that if tariff measures are obstructed, Washington's efforts to find alternative revenue sources could further weaken the dollar.

Richmond Federal Reserve Bank's strategy expert Aroop Chatterjee noted, "We believe that the narrative around the dollar's depreciation is taking shape in the medium term." This sentiment is echoed by the recent performance of the ICE U.S. Dollar Index, which has declined by 8.9% year-to-date, marking the worst start to a year in its history.

Traditional interest rate differential trading logic has been disrupted by the unpredictable policies of Trump. Investor interest in U.S. assets has waned, leading to a decoupling between U.S. Treasury yields and the dollar's value. Historically, higher yields have indicated a strong economy and attracted foreign investment, but recent trends have shown a divergence between yields and the dollar's performance.

Since April, when Trump announced his "liberation day" tariffs, the 10-year U.S. Treasury yield has risen from 4.16% to 4.42%, while the dollar has depreciated against a basket of currencies. This decoupling has raised concerns about the sustainability of U.S. fiscal policies and the potential for further dollar weakness.

Analysts from various institutions have highlighted the risks associated with the dollar's decline. Michael de Pass, global head of rates trading at Castle Securities, noted that the dollar's strength has historically been underpinned by institutional integrity, including the rule of law, central bank independence, and policy predictability. However, recent developments have called these factors into question, raising concerns about the dollar's credibility.

Andreas Koenig, global head of foreign exchange at Allianz Asset Management, warned that the changing dynamics between U.S. Treasury yields and the dollar could increase risks for investors seeking safe-haven assets. The traditional stability provided by the dollar has been disrupted, potentially leading to higher volatility in investment portfolios.

Looking ahead, several analysts have identified potential catalysts for further dollar weakness. These include additional softness in the bond market, escalating trade tensions, and weakening U.S. economic data. Paresh Upadhyaya, head of foreign exchange strategy and portfolio manager at Amundi Pioneer Investment Management, predicts that the Bloomberg Dollar Index could depreciate by an additional 10% over the next 12 months.

Goldman Sachs has identified a significant risk to the dollar's outlook: the potential implementation of a "capital tax" on foreign entities and investors. This measure, part of the "Beautiful Law" proposed by Trump, could impose additional taxes on companies and investors from countries deemed to have punitive tax policies. This could further deter investment in the U.S. and exacerbate the dollar's decline.

Matthew Hornbach, global head of macro strategy at Morgan Stanley, noted that foreign investors are reassessing their exposure to U.S. assets, including currency risks. This trend is expected to continue, putting further downward pressure on the dollar over the next 12 months. Morgan Stanley predicts that the dollar index could fall by approximately 9% by this time next year.

Shahab Jalinoos, head of G10 foreign exchange strategy at UBS, highlighted that increased policy uncertainty could lead investors to raise their hedging ratios, potentially resulting in billions of dollars in dollar selling. This dynamic could further exacerbate the dollar's decline, as investors seek to diversify their portfolios and reduce exposure to U.S. assets.