US Dollar: Medium-term depreciation risks build – Nordea

Nordea strategists argue that while near-term risks for the Dollar are broadly balanced, the longer-term outlook remains negative. They highlight recent weaker US data, shifting Fed expectations, low FX volatility, yield-curve steepening, rising term premium risks and stretched US asset valuations as factors likely to weigh on the Dollar and keep EUR/USD supported over time.

Balanced near term, weaker beyond

"Looking ahead, we see the near-term risks to the dollar as broadly balanced, with the potential for both appreciation and depreciation over the remainder of the year. However, we maintain our view that the dollar is likely to weaken next year."

"Should US activity data rebound and lead markets to rebuild expectations of Fed tightening, this could provide renewed support for the dollar in the near term."

"While the near-term outlook therefore looks relatively balanced, we continue to see the medium-term risks as skewed towards a weaker dollar from current levels."

"We expect the curve to steepen further over the next two years, which should ultimately weigh on the dollar."

"Taken together, we believe the combination of further US yield-curve steepening, rising fiscal and term-premium concerns and elevated US asset valuations will increasingly outweigh the support from a relatively resilient US economy."