Dollar gains built on expectations of an earlier Fed tightening have given way to heightened uncertainty over medium-term global growth prospects, as US currency hedges reserves over risk conditions, Credit Suisse says. .
The bank expects the dollar to rise against the euro and the yen with mixed performance elsewhere.
The bank maintains a short euro-dollar (EUR / USD) exchange rate target of 1.1770.
He also suggests buying the dollar to yen (USD / JPY) exchange rate if it drops to near 108.0 with potential third quarter gains at 114.0
US dollar strength on Hawkish Fed turns to defensive support
Credit Suisse notes that the dollar strengthened sharply in an initial response to the Federal Reserve’s policy meeting in June, as expectations of Fed tightening were put forward.
After registering a limited correction, the dollar strengthened again with EUR / USD close to 3-month lows just above 1.1800.
The US currency has gained ground despite falling long-term US bond yields, suggesting there are other things at play to trigger demand for the dollar.
“While the initial rebound in the US dollar from mid-June lows can be easily attributed to the hawkish turn in US monetary policy expectations, more recent price action appears to be the product of a broader range of factors. “
In particular, banknotes have increased caution about medium-term growth prospects.
Spread of Delta variant triggers discomfort
According to Credit Suisse, there are three potential factors behind a potentially more cautious stance.
The spread of the Delta coronavirus variant is a cause for concern, especially as the number of cases increases in highly vaccinated populations like Israel and the United Kingdom.
This rapid spread has potentially important implications for countries with lower vaccination rates.
The bank also points to weaker Chinese business confidence data, which suggests the economy is vulnerable to a cyclical downturn.
Credit Suisse is also signaling a correction in oil prices amid speculation that OPEC cohesion will collapse.
While confidence deteriorates sustainably, Credit Suisse notes the extent of dollar demand on defensive grounds.
“A number of more broadly negative risk factors could help interpret the strength of the dollar in terms of ‘safe haven’, highlighting investor concerns about less constructive medium-term growth prospects.”
The bank expects clear hawkish rhetoric from the Fed to be needed to stimulate large-scale dollar buying.
“Markets will likely need to see further clear confirmation of the FOMC’s hawkish intentions within the minutes in order to revive the hypothesis of an idiosyncratic dollar strength.”