U.S. Dollar Forecast: Capital Economics Look for ~5% Rally

Image © Adobe Images

Capital Economics, the independent economics research provider, maintains a view the Dollar will continue to strengthen over the coming weeks, but it should turn lower from around mid-year.

The call comes in the wake of the recent banking market turmoil in the U.S. and Europe that Jonas Goltermann, Deputy Chief Markets Economist at Capital Economics, says complicates the picture for the Dollar.

"The outlook for the dollar is even murkier than a couple of weeks ago. For now, we are sticking to our view that the greenback will strengthen as the global economy struggles over the next few months," he says in a recent note.

Goltermann says the troubles faced by regional U.S. banks serve as a warning that the Dollar could come under pressure should further stress in the sector emerge, and they remain confined to the U.S.

"To the extent that the U.S. does indeed prove to be the main victim of banking sector weakness, the dollar will probably weaken sooner and by more than we currently forecast," he says.

Should banking sector stresses reside the Federal Reserve can refocus efforts on lowering U.S. inflation, and this would potentially benefit the Dollar.

However, if banking stresses spread around the world the Dollar would be better supported amidst classical safe-haven demand.

"Many analysts, ourselves included, put significant weight on the dollar’s role as a 'safe-haven' currency in judging the prospect of the US currency. In short, the common assumption is that when risk appetite worsens, the dollar benefits," says Goltermann.

In addition, Capital Economics maintain a base-case scenario that looks for a slowdown in global growth that would typically weigh on global equities and support the Dollar.

"We continue to expect a near-term rebound in the dollar, in particular against riskier currencies," he adds.

Capital Economics' current forecasts imply a ~5% rally in the Dollar index, a measure of broader Dollar performance against a basket of key currencies.

A larger appreciation is meanwhile expected to come against some of the more risk-sensitive currencies, by the middle of the year, "after which we anticipate a gradual decline in the dollar," says Goltermann.