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U.S. Dollar Strength Likely Temporary says Citi and Standard Chartered
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U.S. Dollar Strength Likely Temporary says Citi and Standard Chartered
Mar 22, 2024 2:18 AM

- "Fundamentals for the USD will remain unsupportive" - Citi

- Accumulate currencies to bet against USD says Standard Chartered

- Short term USD rally possible around U.S. election

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GBP/USD spot at time of publication: 1.2912Bank transfer rates (indicative guide): 1.2560-1.2650Specialist transfer rates (indicative guide): 1.2700-1.2780More information on specialist rates hereThe Dollar's recent strength is likely a short-term phenomenon and not the start of a more sustained move higher, according to analysis from lender Standard Chartered and the world's largest dealer of FX, Citibank.

Analysts at Standard Chartered - the London-based, Asia-focussed bank - said a frequent question being asked by clients is whether the Dollar has much further upside, given the rally in the currency that characterised September.

"A USD corrective rally is clearly underway as risk sentiment has turned more cautious," says a note from Standard Chartered. "Rising new COVID-19 cases in the US and Europe and thus-far stalled US fiscal stimulus talks likely caused risk appetite to falter."

Stocks endured a turbulent September that prompted investors to liquidate some exposure, a process that inevitably draws a bid for the Dollar. "This has triggered the liquidation of some speculative short USD positions," says Standard Chartered.

Indeed, recent price action that saw the Euro-Dollar exchange rate retreat back below 1.19 and the Pound-Dollar exchange rate go back below 1.29, does appear to confirm the Dollar's 'safe haven' status remains intact.

That status can deliver further upside potential, says Standard Chartered as market nerves elevate ahead of the November U.S. presidential vote.

"On the upcoming US election, regardless of the election victor, we believe that fundamentals for the USD will remain unsupportive medium term. However, we see the possibility of a short term USD rally around the election period in the event of a disputed election result, likely driven by short squeeze," says Citibank, in a briefing to clients.

Options markets are implying elevated volatility around the time of the vote, and importantly in the weeks following the vote. This suggests investors are nervous that a tight vote could lead to political wrangling that could prompt an extended period of uncertainty. Such a scenario typically favours the Dollar.

"We expect volatile markets in the coming weeks as the US election process gathers steam, but remain confident that the longer-term fundamental outlook will continue to drive a persistent medium-term USD downtrend. We also believe that the Fed will move quickly to avoid any USD liquidity stress that occurred in Q1," says Standard Chartered. "Therefore, we believe the USD rally is likely to be temporary and the focus should be to identify technical levels that can be used to accumulate currencies against the USD."

Research from Citi shows the Dollar real exchange rate (REER) - which is a measure of the currency's broad value against a basket of trading partners - is meanwhile overvalued, and that a longer-term decline back to fairer valuations is therefore likely.

"Whilst the Dollar REER has fallen since April, it is still 3% higher YTD and our expectation is for a continued medium term decline back towards historical averages ($ REER is currently ~8% above it’s historical mean)," says Citi.

Latest Citi forecasts infer the Fed likely need to remain accommodative for years to come. With uncertainty still high, both economically and politically, more asset purchases will be forthcoming.

"For us, this reduces the impact of risk aversion leading to material USD strength. Additionally, a loose money, loose fiscal mix is likely to keep the USD weak,• says Citi.

Above: "We expect the USD rally to be temporary, hence EUR/USD is likely to find initial support around 1.1490".

A recent run of Dollar appreciation saw EUR/USD temporarily go below the key technical level of 1.1685, should the Dollar rally near-term then a could slide towards strong technical support around 1.1490 is possible according to Standard Chartered, adding:

"If this level fails to hold, the next area of strong technical support lies between 1.1165 and 1.1230. Only a break below this deeper support would cause us to question the medium-term uptrend."

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