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Investing.com - The U.S. dollar has remained largely rangebound despite softening labor data and evolving views on the Federal Reserve’s rate path, according to a new Bank of America analysis released Thursday.
BofA notes that while U.S. labor data shows further signs of softening, resulting in expectations for lower Federal Reserve rates, the dollar has been "relatively less responsive" to these changes. The risk premium embedded in the dollar following what analysts termed "Liberation Day" has been narrowing as rate differentials align more closely with the Dollar Index (DXY).
The market reaction to developments concerning Federal Reserve independence has been notably muted, with BofA citing several factors for this complacency. These include a Fed already priced for cuts, market dynamics suggesting limited risk/reward for pricing such risks, belief that governance frameworks should limit extreme outcomes, and markets that appear already positioned short on the dollar.
Corporate dollar flows may be contributing to the currency’s resilience, according to the bank’s analysis. BofA data indicates both U.S. and European corporations have been consistent dollar buyers throughout much of the second and third quarters, with this activity increasing in recent weeks.
The bank maintains a bearish outlook on the dollar but notes the market "is seeking a fresh catalyst." BofA suggests that if corporate buying subsides, the dollar could resume its depreciation trend and better reflect what the bank describes as "more existential emerging risks."
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