JP Morgan is cautious about the future of the U.S. dollar. They cite factors like slowing U.S. growth, strong global support, and less interest in U.S. assets as reasons for their outlook. Key reasons for their negative stance include the slowing U.S. economy, actions taken by other countries, and low energy prices driving demand higher. The bank predicts that the dollar may decline in the long run, leading to what they call a “dollar discount.” Recent data, including jobless claims and auto sales, suggests that the dollar could weaken even more. They think U.S. growth will slow more than in other developed and emerging economies this year, despite mixed payroll data. Looking ahead to 2025, JP Morgan expects U.S. growth to slow but sees potential gains for currencies like the Australian and New Zealand dollars, the Norwegian krone, the euro, and the yen. They also anticipate stronger performances from currencies in emerging markets. They note a significant change in market expectations with a lower terminal rate from the Federal Reserve and a rise in the U.S. bond term premium, both of which are not favorable for the dollar. Overall, the analysis suggests a downward trend for the U.S. dollar, driven by various economic signals and market trends. A weaker U.S. economy combined with active measures in other countries creates challenges for the dollar. Factors like declining demand for U.S. assets and lower energy prices, which usually boost consumption, complicate the dollar’s strength in the coming months. While recent job and spending statistics present a mixed view, the analysts see clear signs of slowing down. Metrics such as initial unemployment claims and weaker auto sales indicate that domestic demand may be cooling off. This, combined with expected policy changes elsewhere and a growing interest in non-dollar assets, increases pressure on the dollar. Market perceptions have shifted, with expectations for lower rates and higher long-term yields, making it less appealing to invest in the U.S. For those tracking interest rate differences, the narrowing gap in central bank policies is evident. Reductions in U.S. rate forecasts, even before policy changes take effect, lessen interest in being long on the dollar. Other central banks, especially in commodity-driven economies, seem steadier, shifting focus away from the dollar. The concept of a “dollar discount” suggests that the dollar’s longstanding valuation may be reversing. This change in sentiment can accelerate adjustments in market positions, especially among leveraged traders. As we look toward 2025, currencies linked more closely to global demand, like those from smaller export-oriented nations, become more appealing. With current indicators across markets, attention should shift to global yield curve movements and how they reflect changes in perceived real rates and inflation expectations. A stable economic environment outside the U.S., particularly with ongoing fiscal support in Europe and Asia, could support a shift from defensive dollar holdings to more cyclical currencies. As this premium decreases, strategies that relied on a strong dollar based on policy differences will need to be reassessed. With the Fed likely having reached its peak rate, the market’s focus will shift toward relative valuations. This transition favors currency pairs that show better rate spreads and stronger underlying economic data. It’s important to closely monitor how these trends develop in spot volumes and forward contracts. Changes in rate differentials become even more important alongside increased capital flows into sovereign debt markets offering higher yields after accounting for inflation. This opens opportunities for strategic positions in currency pairs that may quickly align with the broader trend. With relative underperformance expected to widen geographically, and yield-seeking behavior increasingly evaluated against historical volatility, our strategy must balance risk with opportunity. Whether using FX forwards, options, or leveraged structures, positioning should reflect the growing chance that this discounted trend continues.

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