Has the US dollar reached a turning point? Strategist: It's time to be bearish
The US dollar has experienced a period of "excessive optimism" this year, but now there are risks of a reversal. With gold benefiting from expectations of Fed rate cuts and declining bond yields, a bearish sentiment surrounding the US dollar is emerging, while other major currencies are also gaining strength. Market sentiment towards the US dollar has shifted from "extremely optimistic" to a more cautious outlook. Gold has risen by 15.8% year-to-date, slightly below the S&P 500 index's 16.7% gain over the same period. Former US President Trump has indicated that if he wins the presidential election in November, he is inclined to see the US dollar weaken. Against this backdrop, a neutral stance is taken on the USD/JPY pair, while a bullish stance is taken on the GBP/USD and EUR/USD pairs
Ned Davis Research stated that the US dollar has experienced a period of "excessive optimism" this year, with risks of a reversal now apparent.
Tim Hayes, Chief Global Investment Strategist at the firm, believes that it is now a time for other major currencies to shine, or at least perform relatively better than the US dollar.
Specifically, Hayes believes that as gold benefits from expectations of Fed rate cuts and declining bond yields, a bearish sentiment surrounding the US dollar is forming, while other major currencies are also gaining strength.
He pointed out that the market sentiment towards the US dollar has fallen from "extremely optimistic" levels, as shown in the chart below.
The optimistic sentiment surrounding the US dollar once reached an extreme, but is no longer present.
In a client note last Friday, Hayes wrote, "When using trend and sentiment indicators, we often explain that our approach is to 'follow the trend until it reaches an extreme, then reverse.'"
According to FactSet data, as of this Monday, the US Dollar Index, which measures the US dollar against a basket of competing currencies, fell by 1.5% in July to 104.3 points, but is still up 2.9% year-to-date. The index reached a one-year high of 107 in early October last year and approached this level again in June.
In contrast, gold has risen by 15.8% year-to-date, slightly below the S&P 500 index's 16.7% increase during the same period.
However, Dave Sekera, Chief US Market Strategist at Morningstar, believes that if the Fed's preferred inflation gauge, the PCE, unexpectedly rises, it could trigger another stock market sell-off.
Sekera expects the core PCE annual rate for June to come in at 2.5%, down from 2.6% a month ago. The Fed aims to see the annual inflation rate fall to around 2%. Safe-haven assets like gold and bonds are expected to benefit from easing inflation, as it would support the Fed's rate cuts in 2024.
Former US President Trump has stated that if he wins the presidential election in November, he would prefer to see a weaker US dollar. This has also influenced market views on the outlook for the US dollar.
In this context, Hayes recommends a neutral stance on the US dollar against the Japanese yen, and a bullish stance on the British pound against the US dollar and the euro against the US dollar