Softer USD tone to develop over the next few months – Scotiabank

A cautious start to the week leaves the USD trading mixed against its major currency peers. Shaun Osborne, Chief FX Strategist at Scotiabank, analyzes Greenback’s outlook.

The broader fall in the USD does appear to be overshooting the shift in spreads

Last week’s drop in the USD was significant – nearly 3% in DXY terms – and unusual. Investors may be divided over whether this was a one-off or whether the start of a bear phase in the USD started with a bang. The latter seems more likely; relative US growth and interest rate differentials have been a major prop for the USD during its bull run and those supports, especially yields, have been diminished. 

The broader fall in the USD does appear to be overshooting the shift in spreads somewhat in the very short run but the move is not overly significant at this point and I still expect a somewhat softer USD tone to develop over the next few months as markets factor in the Fed reaching its policy cycle peak.