USD weak unless proven otherwise, says Macquarie strategist

Investing.com -- Viktor Shvets, the Head of Global Desk Strategy at Macquarie Capital, provided insights into the recent decline of the U.S. dollar and its potential future trajectory. The dollar index (DXY) has seen a significant drop, falling approximately 10% from its high on December 24th, prompting debates on whether the currency is now oversold or if there is more downside to come.

Shvets highlighted that speculative non-commercial contracts have shifted from a bullish stance on the dollar to bearish positions, a change that often serves as a contrarian indicator. Moreover, the Euro has seen a reversal in speculative positions, now favoring the European currency. Despite the supply of the dollar either increasing or remaining stable, and real interest rate spreads against German Bunds and Japanese Government Bonds being historically high, the dollar has weakened.

The strategist discussed the ongoing narrative of U.S. non-exceptionalism and doubts about U.S. assets as a safe haven, which have contributed to the dollar’s depreciation. Nonetheless, the U.S. dollar retains a dominant role in global finance, accounting for the majority of foreign exchange reserves, commercial transactions, non-resident credit, and a significant portion of SWIFT volumes. U.S. Treasuries continue to be the most liquid market, and the U.S. maintains sizable current account deficits without capital controls.

Despite these strengths, the dollar is still considered overvalued, particularly against the Japanese Yen. Shvets noted that the Federal Reserve has room for several rate cuts, with nominal neutral policy rates likely around 3-3.5%, while the Bank of Japan and European Central Bank have different monetary policy paths ahead.

The Macquarie strategist also pointed out that the U.S. appears to be shifting its approach to global leadership, with chaotic policy shifts and a reluctance to provide global public goods. This change could increase risk premiums and diminish the perceived safety of U.S. dollar assets.

In conclusion, Shvets suggested that the longstanding view of the U.S. dollar as a strong currency might need re-evaluation. The uncertainty brought about by the current administration’s policies could lead to sustained investor demand for alternative currencies, such as the Euro and Yen, potentially capping any appreciation of the U.S. dollar. He posited that the new narrative might be to consider the dollar weak unless proven otherwise.