The US dollar has reversed around half of the gains it made from mid-July to end-October amid a sharp fall in US Treasury yields and a general compression of risk premia across markets, leaving the greenback, in aggregate, roughly where it started the year. Our view is that, while there may be still some further turbulence in markets to come in the near term as the US economy slows and major European economies slip into recession, the outlook for risk sentiment is better than we previously anticipated. As such, we expect the dollar to ease back gradually over the course of next year as the FOMC shifts towards easing, Treasury yields fall further and expected interest rate differentials move against the dollar. But we think the greenback will hold up better than most analysts appear to forecast, as the US economy’s outperformance of its peers endures and an equity market bubble centred around US “AI” tech stocks continues to build.
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