US Dollar Is Down, But Not Out: BCA By Investing.com

Investing.com — Despite the recent weakness, analysts at BCA Research said in a note on Monday that it remains resilient and is expected to bounce back in the coming months.

The global economic landscape, characterized by a decline in manufacturing and growing caution in financial markets, is setting the stage for a recovery in the dollar.

The greenback may be on the decline, but according to BCA Research, it’s far from out of the game.

In 2024, global financial markets saw the US dollar lose some ground as the broader economic environment was clouded by uncertainty.

Global output, which stabilized briefly at the start of the year, entered a renewed contraction phase. This relapse is accompanied by weakness in oil and prices, key indicators of global economic activity.

In addition, various segments of global risk assets failed to surpass their previous highs, signaling deterioration in global growth conditions.

Moreover, liquidity conditions are tightened. BCA Research notes that global dollar liquidity, defined as the sum of the US monetary base and securities held in custody by the Federal Reserve for foreign officials and international accounts, is declining.

This factor has contributed to the current decline in dollar strength. However, this very dynamic of reduced liquidity could ultimately prove to be an advantage for the dollar.

“In particular, tightening global USD liquidity – calculated as the sum of the US monetary base and securities held at the Fed for foreign officials and international accounts – is usually positive for the greenback,” analysts said.

This tightening is linked to global manufacturing, which is closely correlated with dollar movements. As the global economy contracts, the US dollar often behaves countercyclically, appreciating as riskier assets suffer losses.

The current situation somewhat resembles the bear market of the early 2000s. In the first phase of the 2000-2002 bear market, the US dollar appreciated as global equity markets, including emerging market (EM) equities, s – they sold.

If this pattern repeats itself, the dollar could follow a similar trajectory in the coming months, gaining strength in the early stages of the bear market.

One of the key reasons why BCA Research remains bullish on the US dollar is the structure of the global financial system.

The US dollar remains the dominant reserve currency worldwide, with most international transactions settled in dollars.

Moreover, in times of economic stress, investors often flock to the safety of US assets, which further support the dollar.

“The trade-weighted US dollar has so far not broken below the lower boundary of its ascending channel,” analysts said.

The currency continues to benefit from its safe haven role, which should support demand, especially as economic uncertainties persist globally.

Emerging market stocks and currencies are closely correlated with global growth. The BCA indicates that the renewed contraction in global manufacturing is likely to push EM stocks and currencies lower.

A stronger US dollar could add to these pressures, making it more expensive for emerging markets to service their dollar debt, further hampering their growth prospects.