"The dollar remains resilient and 'expensive' in near-term outlook, according to Bank of America"
US Dollar Index Strength
Bank of America reports that the US Dollar Index (DXY) continues to show strength, trading at around 105.81, up 0.2% on Friday. The index has seen a 4.4% increase year-to-date, outpacing its key drivers by 3%. Key drivers include Federal Reserve monetary policy, Chinese economic conditions, and energy prices.
Reasons Behind Strength
Bank of America FX Strategist Adarsh Sinha attributes the dollar's strength to euro risk and increased demand for the dollar in carry trade strategies. The euro is facing uncertainty due to France’s upcoming snap election, leading to a EUR:USD risk premium. Additionally, there is a demand for high-yielding USD in a low volatility environment, particularly against the Japanese yen (JPY).
Future Forecast
Despite forecasts for medium-term USD depreciation, Bank of America suggests that near-term strength could persist until closer to Fed cuts and a clearer China recovery. Sinha identifies these as the primary fundamental drivers of the U.S. dollar. Until then, hedging against USD strength is advised.
Recent Developments
The dollar was trading at 159.595 yen on Friday, up 0.4%, following the addition of Japan to the US Treasury Department's list of countries to monitor for currency manipulation. Japanese authorities have been buying yen and selling dollars, resulting in a stronger yen value.