USD: Capital reallocation pressures Dollar outlook – Nordea

Nordea analysts Sara Midtgaard and Henrik Unell argue that the Dollar is likely to weaken over coming years as global capital is reallocated away from US assets and toward other regions. They highlight heavy future US Treasury issuance, rising foreign funding needs in Europe and Japan, and a narrowing US–euro area rate differential as key headwinds for the Dollar.

Reallocation and rates weigh on Dollar

"Although the initial market reaction to the outbreak of the conflict in the Middle East was a stronger dollar, we believe there are now several factors that could push the currency even weaker than we had previously assumed."

"Our broader narrative has been that dollar weakness over the coming years will, in part, be driven by a reallocation away from US assets and towards other investment opportunities."

"Combined with weaker confidence in the US, an increased supply of government bonds in the global market could make it more difficult for the US government to place this debt, potentially leading to price adjustments – in other words, a weaker dollar and higher Treasury yields."

"We expect the European Central Bank to deliver four rate hikes of 25 basis points this year, while the Federal Reserve is likely to keep rates unchanged."

"This would narrow the interest rate differential between the US and the euro area, which could exert further downward pressure on the dollar this year."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)