The US Dollar can exhibit more strength through the end of the current year than previously expected, argue analysts at Wells Fargo. They point out that China's slowdown and a resilient US economy can support the Greenback. However, longer term, they see dollar depreciation.
We are now more optimistic on the dollar's prospects over our entire investment horizon. Given our view for a deteriorating macroeconomic backdrop amid a sharp China deceleration, we believe the dollar could attract safe haven flows that boost the greenback through the end of this year.
We also believe the resilience of the U.S. economy and the possibility of additional Fed rate hikes should also attract investors toward dollar-denominated assets and support the greenback through the end of 2023.
Longer term, we continue to forecast a weaker dollar; however, we now believe the greenback will experience a slower pace of depreciation than previously. We still expect Fed rate cuts to weigh on the dollar next year, but with a U.S. “soft landing” a real possibility and inflation likely to hover above the Fed's target in 2024, sharp rate cuts are now less likely.
With the Fed likely to deliver a version of a “higher for longer” stance on interest rates, the dollar can now exhibit more resilience over the course of 2024.
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