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Investing.com -- The US dollar has experienced the worst start to a year since 1973, but analysis from Bank of America suggests the currency may see more limited downside in the second half of 2025.
According to BofA’s time zone framework analysis, while overall USD price action no longer correlates with Federal Reserve rate cut pricing, cumulative USD return during US trading hours still maintains a +71% correlation with Fed rates pricing in 2025.
The bank notes that unchanged Fed rates for the remainder of the year should moderately support the USD during US trading hours.
Asia-based investors have been the biggest USD sellers so far in 2025. However, a longer-term analysis reveals that USD price actions in Asian trading hours have flattened after cumulative long returns from the past two years unwound to neutral levels. BofA suggests these investors may wait for new bearish USD catalysts to form in other time zones before pushing the currency lower.
The dollar still has significant room to depreciate during European trading hours, but this would likely require global equity markets to outperform US equity for the rest of the year. Foreign investors now have less incentive to increase their FX hedge ratio on US-based assets following the year-to-date USD movement.
While global equities outperformed US markets in Q1 2025, the US regained leadership in Q2. BofA indicates that relative equity performance should be the focal point for global FX investors in the second half of 2025.
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