Brown Brothers Harriman’s (BBH) Elias Haddad notes that the recovery narrative is overshadowing the International Monetary Fund's (IMF) weaker growth outlook, with global equities at record highs and the US Dollar (USD) retracing losses. Haddad does not expect the US Dollar Index (DXY) to break its established 96.00–100.00 range in coming months, as rate differentials and still-strong foreign demand for US long-term securities underpin USD near term.

Range-bound Dollar with structural headwinds

"Markets continue to look beyond the IMF’s gloomier growth forecast and trading the recovery narrative. We agree."

"We don’t expect USD to make new cyclical lows in the next few months. Interest rate differentials between the US and other major economies continues to keep the DXY (USD index) anchored within its nearly one-year 96.00-100.00 range."

"Moreover, foreign demand for US long-term securities (treasury bonds & notes, corporate bonds, equities, gov’t agency bonds) remains strong. The US Treasury International Capital (TIC) data showed that in the twelve months to February, foreign investors accumulated $1615bn of long-term US securities."

"Nevertheless, we expect foreign appetite for US long-term securities to dwindle over time. The Trump administration’s effort to narrow the US trade deficit means fewer dollars will flow overseas, reducing the need for those funds to be recycled back into US securities."

"Fed funds futures imply 45% probability of a 25bps cut by year-end to 3.25-3.50%. Our base case is for the Fed to deliver one cut by year-end, in line with the FOMC’s projection."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)