US Dollar Overvalued, Says Bank of America
The United States dollar is overvalued and likely to weaken as inflation declines, although it will take time, Bank of America economists said in a report.
“Inflation is likely to imply near-term stability and upside for the dollar, given low unemployment and inertia for the core. Still, we look for that upside to be more limited,” they write.
BofA forecasts the EURUSD cross to reach 1.05 in the 1H of this year, appreciating to 1.10 by the end of 2023 and 1.15 a year later, “still below the long-term equilibrium of 1.20-1.25.”
They add: “Geopolitics will continue to linger, and the well-telegraphed debt ceiling showdown lurks.” The EURUSD falls slightly to 1.06.
Federal Reserve minutes were as expected, but the market is far more inclined now to latch on to hawkish talk given the price action of the last few weeks. It still leaves us with a Fed that’s not done with hiking.
FOMC minutes had a hawkish tint
Although market rates are a tad higher following the Fed minutes from the 1 February Federal Open Market Committee meeting, there was nothing material in them, at least nothing terribly unexpected, according to ING Economics.
Bloomberg headlines noted that some (non-voting) members would have favoured a 50bp hike, but this was not new news. Bullard made that clear in a prior CNBC interview in fact. The 25bp hike delivered was unanimous, which was also not new news.
The only item of note really was that the minutes were expected to be a tad more dovish. Reading through them, they had a clear hawkish tint. This is in stark contrast to the impact of market reaction to the FOMC outcome itself, which had headlined with a nod toward a disinflationary tendency.
Indeed this was mentioned in the minutes, but beyond that the dominant theme was a Fed continuing to fret about inflation, and noting that the labour market remains very tight.
In terms of liquidity conditions, the Fed noted some easing in the use of the reverse repo facility and an expectation that that continues through 2023. The Fed noted a likely fall in reserves as we head into the April tax season.
They also noted a likely tendency for money market conditions to tighten ahead, which should correlate with falls in the cash going into the reverse repo and a rise in relative repo rates. In fact, that is a theme to be expected right through 2023.
Overall, the market reaction is for higher rates.
At the FOMC itself, the market was looking for anything dovish to latch on to. From the minutes, that’s flipped, with the market now fretting over any hawkish hints. They were always there. But given the moves higher in market rates in the past weeks, there is an increased sensitivity to hawkish talk. #US Dollar Overvalued, Says Bank of America
