A dollar demise?
A case is most certainly building for a poor conclusion to 2025 for the Dollar. What’s more is that the current prospects for 2026 don’t look a great deal brighter for those hoping for upside within the greenback. Revisions to US labour statistics for May and June have undermined the capacity for the Federal Reserve to maintain its narrative that a strong labour market justifies holding off on rate cuts. That opens the door for a stronger and swifter easing cycle to begin in earnest this year. Tariffs and the perception of US institutional vulnerability will combine with such monetary adjustments to contribute to USD selling forces.
Global stock indices continue to outperform. Despite the threat of tariffs and geopolitical uncertainty, risk appetite has generally remained constructive. If what I am suggesting is correct and the Fed does start ramping up its easing cycle, then investors will increase their hedging ratios on US assets. This will only be helped by the fact that in the absence of financial Armageddon, such a cycle is typically supportive to US equity and treasury valuations. As the volume of assets held increases, the cost of hedging the long Dollar exposure created by such holdings decreases as short end rates fall. This will create selling pressure within the dollar into year end and into 2026.
There will be certain risks to this view. Much the same as it was data published this month that revised figures released in May and June this year respectively, there is always a chance that the narrative of a strong labour market re-emerges. What’s more is that global inflation is far from dead and buried and as tariffs continue to disturb global trade there is the possibility for tariff induced inflation. Within such an environment the currencies more likely to fill the void that the dollar leaves behind are emerging market currencies. As such, the carry trade is likely to continue to be popular. A stubborn bank of England will also allow the Pound to benefit at least in the shorter run. As the ECB approaches the conclusion of its easing cycle, the Euro may also be able to reflect a weaker dollar into year end.
Discussion and Analysis by Charles Porter
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