U.S. dollar to stay under pressure from tariff, debt and rate cut expectations

Yahoo

4 days ago

By Sarupya Ganguly
BENGALURU (Reuters) -The U.S. dollar will remain weak over the coming months, a Reuters poll of FX analysts forecast, caught in a tangle of mounting U.S. debt concerns, erratic tariff policies and rising interest rate cut expectations.
Growing unease over President Donald Trump's on-again off-again tariffs, and a tax-cut and spending bill that is expected to add $3.3 trillion to the national debt, have led to a scurry of investor outflows from dollar-denominated assets in recent months.
A surge in the "term premium" - compensation investors demand to hold longer-term debt - has also contributed to a nearly 11% dollar decline against a basket of major currencies this year and to a three-and-a-half-year low against the euro and sterling last week.
Recent data from the Commodity Futures Trading Commission also showed the short-dollar trade was at a near two-year high, suggesting further weakness may be in the offing.
Asked how that positioning would change by end-July, more than 80% of FX analysts in a June 27-July 2 Reuters poll, 42 of 52, said it would broadly hold or net-shorts would increase.
A majority of these same FX analysts surveyed by Reuters in April and again in May had already concluded the reserve currency's "safe haven" shine had partly eroded.
"We are expecting a weaker U.S. dollar in the coming months," said Jennifer Lee, senior economist at BMO Capital Markets.
"The recent budget, the inflationary impact tariffs are going to have and what that means for the Federal Reserve, and the pointed comments President Trump is using against Fed Chair Jerome Powell - all of that doesn't bode well for the overall U.S. economic outlook at least over the rest of the year."
Trump has repeatedly demanded immediate and deep rate cuts. Powell, whose term ends in May 2026, reiterated on Tuesday the central bank's plan was to "wait and learn more" about the impact of tariffs on inflation before lowering interest rates.
TARIFF NEGOTIATIONS
Asked what would be the main driver for the U.S. dollar over the coming month, nearly 37% of respondents, 22 of 60, said "tariff negotiations". Attention will now turn to Trump's next move after the July 9 expiry of a 90-day pause on sweeping tariffs he announced in early April.
Eighteen respondents said "interest rate differentials", which have not been important in recent months - with the euro surging while the European Central Bank was cutting rates and the Fed on hold all year.
Thirteen said "portfolio diversification", supporting findings from a June survey where a near-90% majority of FX strategists said demand for dollar assets would decline.
Seven chose "debate over Fed independence".
The euro, up nearly 14% so far this year and on course for its best annual performance against the greenback since 2017, was forecast to hold steady at $1.18 in six months and climb about 2% to $1.20 in a year, survey medians from 70 strategists showed.
Nearly 70% of FX analysts in the latest survey upgraded their euro-dollar forecasts from last month, leading to the highest medians since September 2021.
But most of those forecasts were formulated in the past week, during which the common currency gained nearly 3%, suggesting they will soon be upgraded.
"We continue to watch this slower burn story of real money and... a consistent selling of the dollar, particularly from European real money," said Alex Cohen, FX strategist at Bank of America.
"That just speaks to more structural reasons for the dollar to continue to grind lower in the coming months."
(Other stories from the July foreign exchange poll)