USD: Softness to continue over the medium term - Wells Fargo

Analysts from Wells Fargo, point out that the divergence that has characterized the past two years between the Federal Reserve and other central banks has flipped to a story of convergence. They seen the softness in the US Dollar set to continue over the medium term.

Key Quotes: 

“The U.S. dollar has been soft this year, as the Federal Reserve’s trade weighted dollar major currency index is down 6.8 percent year-to-date. Over the past couple of years, monetary policy at the Fed has diverged from policy at the world’s other major central banks. Policymakers at the Fed have spent most of the past two years gradually tightening policy amid steady economic growth and an ever-tightening labor market, while the Bank of Japan, the European Central Bank and others have eased policy further over that period.”

“More recently, the divergence that has characterized the past two years has flipped to a story of convergence. Markets have begun to anticipate that central banks around the world will soon begin to slowly take away the respective punch bowls. This has occurred at the same time that inflation has slowed markedly in the U.S., raising questions about whether the Fed’s current projected path of tightening is too hawkish.”

“After a surge in optimism following the U.S. presidential election last fall, markets appear to have dialed back their expectations for a substantial fiscal bump.”

“Our currency strategy team expects trend softness in the U.S. dollar to continue over the medium term. They forecast moderate emerging currency gains, with global financial market conditions mostly benign even as some major central banks start to move to less accommodative monetary policy.”