The greenback remains deeply overvalued against the euro, pound, and yen. We think the correction that began last year will continue to unfold over the next 12 months, with the trade-weighted exchange rate underperforming relative to the world’s biggest economies.

But we don’t expect this decline to prove as fast-paced or as sustained as the consensus would suggest. We’re not convinced the Fed will cut rates before May 2024, and we think long-term yields could remain remain relatively elevated as liquidity ebbs and quantitative tightening efforts continue. This could mean that the dollar maintains positive real carry relative to currencies like the yen, euro, and Chinese renminbi.. Renewed financial turbulence could increase the currency’s safe-haven appeal, and from our perspective, the key factors that have driven secular dollar depreciation cycles in the past – falling short-term yields in the US and relative outperformance in other parts of the global economy – simply aren’t likely to follow long-standing patterns.

Trade-Weighted Dollar Indices