The dollar will weaken next year as the economic boost from fiscal policy wanes and rising interest rates start to hurt, according to Citigroup Inc. The greenback will fall around 2 percent against the Group-of-10 peers over six to 12 months after climbing 1 percent in the next three months, analysts including London-based Jeremy Hale wrote in a note.
Absolute growth and relative cyclical outperformance in the U.S. will slow and the yield advantage enjoyed by the dollar will be less sustainable, they said.
“More medium term, our view is that the fiscal support to growth eventually fades in the U.S. and tighter monetary policy starts to bite,” the analysts wrote. “A lower dollar becomes the most likely source of equilibrium in portfolio balance terms.”
The U.S. currency has rallied against all G-10 peers this year, buoyed by three Federal Reserve rate hikes while robust corporate earnings sent major benchmark stock indexes to record highs.
Citigroup’s call for the dollar to top out next year echos those by other Wall Street investment banks including Morgan Stanley and Goldman Sachs Group Inc.
“We see several changes to the global economic backdrop which, combined with a few negative medium-run factors, point to more downside than upside to the broad dollar in 2019,” Goldman Sachs analysts including Zach Pandl wrote in a note dated Nov. 18. “Slower U.S. growth tends to result in lower dollar returns (especially against G-10, but to some extent versus EM as well) even when U.S. interest rates are rising faster than expected.”
The Bloomberg Dollar Spot Index has gained more than 7 percent from a low in April, while hedge funds have raised their net long positions this month to the highest since January 2017.
The bull run in the dollar has ended and it’s time to sell the currency, Morgan Stanley’s global head of foreign-exchange strategy Hans Redeker wrote in a note last week. “The USD may weaken as credit spreads widen, equity prices fall, and sovereign bond yields begin falling amid disinflationary pressure and falling oil prices.”