Time is coming for a USD correction, but bears will have to remain patient – Scotiabank

The Federal Reserve lifted its policy rate 75 bps to 3.25%. The USD advanced in response to the announcement. Economists at Scotiabank believe that the greenback is set to remain firm for now, but sustained gains are unlikely.

USD appears quite significantly overvalued

“We expect the USD to remain firm in the short run but we remain reluctant to factor in additional, sustained USD gains from here and we think it would be complacent to dismiss out-of-hand downside risks here. This is sounding a bit like a broken record but the salient points remain that 1) the USD appears quite significantly overvalued. 2) The USD now looks quite fully priced, with peak Fed funds expectations having advanced by more than 100 bps since early August. 3) Speculative and leveraged accounts have turned more bullish on the USD and hold the biggest combined (net) USD long since February.”

“The counterarguments in favour of the USD remaining strong for now are clear. 1) Elevated geo-political and market risks support USD demand. 2) Alternatives are scarce and the USD is still the ‘least dirty shirt’ among the G10 currencies.” 

“We think the time is coming for a USD correction but dollar bears will have to remain patient for a little longer.”