Despite the expected rate cuts by the Federal Reserve in 2024 and 2025, analysts at Wells Fargo Investment Institute expect the US dollar to remain strong.
Analysts listed the reasons for the forecast in a document dated Monday, focusing on differences in interest rates, the global economic situation, and the value of the US dollar compared to other major currencies.
Interest rate differentials have been a major factor in the strength of the US dollar in recent years. Since the Federal Reserve began raising interest rates significantly in March 2022, the value of the US dollar has remained above its long-term averages.
With the Federal Reserve expected to start cutting interest rates, one would logically think that the value of the US dollar would decline significantly.
However, analysts believe that the US dollar will likely remain within its recent range, mainly because other important central banks, such as the European Central Bank and the Bank of Japan, are also expected to cut their interest rates.
The interest rate gap between the US and other advanced economies is expected to persist, although it may be smaller, which should help maintain the value of the US dollar. For example, the European Central Bank is expected to keep interest rates steady, while the Bank of Japan is expected to cut rates, but there will still be a large gap in favour of the US dollar.
The global economic situation is very important in determining the future value of the US dollar. The Eurozone, in particular, is experiencing significant economic difficulties, including reduced demand for exports due to the continued economic slowdown in China. This could lead to further depreciation of the Euro, thus providing additional support to the US dollar.
Moreover, although the US economy is expected to grow more slowly, it is likely to outperform many of its international peers. This relative economic strength, coupled with the Fed’s cautious approach to cutting interest rates, is expected to prevent a sharp decline in the value of the US dollar.
The US Dollar Index, which compares the greenback to a basket of six major currencies, has been above its long-term averages since the start of the rate hikes. “Our expectation now is for the US dollar to be less strong and to remain near – or slightly above – its recent value range,” analysts said.
According to Wells Fargo, even with the planned rate cuts, the US dollar is not expected to fall significantly from its current levels. The resilience of the dollar index reflects both interest rate differentials and ongoing global economic uncertainty that are likely to maintain strong demand for the US dollar as a safe-haven currency.
Analysts continue to favor U.S. stocks and bonds over international or emerging market assets, in part because of the expected resilience of the U.S. dollar. A continued strengthening of the U.S. dollar could weigh on global markets, making investments in the United States relatively more attractive.
For investors, this forecast suggests that the US dollar’s status as a leading global currency will remain unchanged, even as the Federal Reserve changes its interest rate policy. This is likely to provide continued support for US assets, further strengthening the investment strategy in domestic markets.
