Doha: Qatar National Bank (QNB) has projected that the US Dollar will likely adjust to more balanced levels, influenced by fiscal consolidation efforts, further monetary easing, and the new administration’s emphasis on rectifying economic imbalances.
According to Qatar News Agency, QNB’s Weekly Commentary highlights that currency fluctuations offer significant insights into global macroeconomic trends, especially in the context of major currencies from advanced economies such as the US Dollar, Euro, Japanese Yen, Swiss Franc, and Pound Sterling. Foreign exchange markets are driven by capital flows, reflecting real-time reactions and expectations concerning risk appetite, economic performance, and interest rate differentials.
In recent times, major foreign exchange markets have experienced notable volatility. The USD Index (DXY), which measures the value of the USD against a basket of six major currencies, has appreciated significantly following Donald Trump’s victory in the November 2024 US general election. Since September 2024, the DXY has risen by almost 6 percent, a rapid increase for this asset class, closely mirroring the returns of the more volatile US equities.
As the DXY surpassed critical levels noted in September 2023 amid “peak” Federal Reserve hawkishness, analysts and investors are debating the future direction of the USD. Many argue that the USD remains supported by Trump-driven US tariffs against major trade partners, a strong US economy, and a Fed potentially compelled to act more cautiously due to higher US inflation.
However, an analysis suggests that the USD is overvalued and requires adjustment. The real effective exchange rates (REER), which account for trade-weighted, inflation-adjusted exchange rates, indicate that the USD is the most overvalued currency in the advanced world by more than 21.8 percent of its fair value. This supports the view that there is minimal room for further USD appreciation beyond existing levels.
QNB posits two factors that could pose challenges to the USD in the medium term. Firstly, changes in the fiscal stance of major advanced economies could reduce growth and interest rate differentials with the US. As other economies adopt more expansionary measures and the US aims to consolidate its fiscal policies, the growth advantage enjoyed by the US could diminish, favoring other currencies over the USD.
Secondly, despite uncertainties regarding US policy rates and the belief that monetary easing has concluded, QNB anticipates at least two more rate cuts by the Fed in 2025. Factors such as a downtrend in non-cyclical inflation and a slowdown in economic activity support further rate cuts, affecting the interest rate differential between the US and other economies and potentially shifting capital to non-USD assets.
QNB concludes that there is limited potential for further USD appreciation beyond current levels. The currency is expected to move towards more balanced levels, aided by fiscal consolidation, additional monetary easing, and efforts to address economic imbalances.