US Dollar to Fall as US Economy Comes Down Off "Sugar High" say J.P. Morgan

- US growth peaking after stratospheric surge say J.P. Morgan.

- US Dollar will probably follow suit during the coming months.

- Eurozone, emerging markets and Asia to continue growing.

The Chase Tower, New York © Kristen Cavanaugh, Flickr, reproduced under CC licensing

US growth is surging and with it the Dollar, but the trend has its limits suggest analysts at J.P. Morgan.

Analysts at the world's largest investment bank say the primary driver of US outperformance has been fiscal stimulus from President Donald Trump's recent tax cuts, but this "sugar high" won't last.

The US economy is expected to grow by an incredible 5.0% in the second quarter, yet this simply represents a 'blow-off peak' that typically precedes a slowdown according to Gabriela Santos, a global market strategist at JP Morgan.

"Our second quarter GDP estimate for the US is coming in at 5.0% - real GDP growth right - so without taking into account inflation, if we think is that sustainable, probably not," says Santos in a Bloomberg News interview. "Perhaps we have some more of that fiscal stimulus, sugar high, for the next 12 months but then that starts to fade and interest rates start to bite a bit a little more. So really the perspective for the US surge is very shortlived, so that is something that should start wearing out whilst the rest of the world starts picking back up." 

The US Dollar will probably fall before growth slows because markets tend to price in events before they actually happen.

"We should see that deceleration, that cool down in US growth, and investors starting to think about it, right - we don't need to wait 12 months for that to start getting priced in - whereas we should see a nice improvement in growth in Europe, EM and Asia in the second half of the year, so I don't know how much longer that Dollar strength persists, but we do think we should see that downtrend in the Dollar to resume in the medium-term," says Santos.

Santos thinks the surge in the Dollar was as a result of growth differentials more than Fed policy so the currency is more intimately linked to growth. Another factor in the Dollar's rise is trade war uncertainty causing a flight to "quality" and safety. 

Assuming the JP Morgan Strategist is right, the diverging growth expectations in the US and Europe infer a strengthening of the Euro versus a waning Dollar towards the end of 2018, and upside for the EUR/USD, which was quoted at 1.1733 on the interbank market at the time of writing.

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