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Avery Shenfeld and Taylor Rochwerg, analysts at CIBC, point out the March FOMC meeting provided clarity concerning the Fed’s 2019 outlook, which included a downgrade in growth prospects and a potential rate hike pushed back into 2020, lending to near-term DXY weakness. They forecast DXY at 94.3 in Q2 2019 and at 92.1 by Q4.  

Key Quotes:  

“Last week’s FOMC meeting saw the Fed backing away from rate hikes this year, and we now see the next move as a mid-cycle, quarter point ease in 2020. Although the US will still outpace other economies in terms of growth, given its current account deficit, it’s the US that needs steady capital inflows to maintain an exchange rate at a steady level. A no-change rate stance by most countries in 2019 should play towards a gradual erosion in the dollar’s earlier gains.”

“A calming in crisis waters could also play into a softening in DXY. Thawing trade tensions between China and the US suggest that investors will reduce their dependence on DXY as a fail-safe, thereby restricting upside potential for the currency. In addition, while its all still up in the air, as long as the UK avoids the worst in the Brexit process (i.e. we don’t have a hard, no-deal exit), the reduction in uncertainty surrounding Brexit will strengthen sterling.”

“The US current account gap hasn’t improved at current exchange rates, despite America getting closer to being a net exporter of oil. The wind down from earlier fiscal stimulus will actually help that balance, by reducing the growth in US import demand. But at the same time, the reduced fiscal stimulus, and a marginal tightening in fiscal policy in 2020, is key to soft track for the Fed on monetary policy, and it’s that development that should promote a weakening DXY in the mediumterm.”