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Investing.com - Almost all foreign exchange drivers were going the U.S. dollar’s way in late 2024 and early 2025. Cyclical USD-positive factors have since faded, with U.S. economic softness and some resurgence abroad, but fear of a sharp U.S. downturn is overstated, according to Standard Chartered (OTC:SCBFF).
Discussion of lost USD exceptionalism has become very common in asset markets, analysts at Standard Chartered said, in a note dated March 21.
“We do not think the USD is immune to cyclical downturns or that the US has unlimited borrowing ability abroad. However, the attractiveness of US and USD-denominated assets provides the USD sustained support via structural capital inflows,” Standard Chartered said.
“We expected the USD to weaken in Q1, partly because we thought the USD entered 2025 overbought. The fear of immediate Trump tariffs seemed overdone, and we saw risk of growth headwinds in H1.”
The bank also noted that the euro has caught up to rate differentials.
“Earlier in the EUR rally, it had lagged noticeably and we had considered the possibility that tariff fears were holding the EUR back. Now the rates and EUR stories seem much more closely aligned,” the bank added.
Fear of a sharp U.S. downturn is overstated, the bank added.
“The January-February number of workers unable to work because of bad weather was the second highest in 14 years. Years with high January-February readings typically show an effect on NFP growth and consumption. So, while there may have been softening, core retail sales bounced back sharply in February,” Standard Chartered said.
“We see the demand slowdown as gradual rather than abrupt. The pipeline of undocumented immigrants entering the workforce is likely to slow, so we could see NFP growth drop to a 50-100k range in coming months,” the bank added.
Offsetting these forces is the likelihood that the Trump administration produces added fiscal stimulus in the upcoming fiscal package.
“We expect the package to go beyond maintaining the 2017 tax cuts, but doubt the combination of tariff revenues and spending reductions will be enough to pay for the tax cuts,” Standard Chartered added.
“Combined with tariffs, we expect these forces to renew USD strength as 2025 progresses.”