The U.S. dollar has stabilized after a sharp decline in August, but Bank of America (BAC) Securities sees more trouble for the greenback.
The US dollar index fell near 101 after the very negative preliminary employment data released today, which revealed that only 99,000 jobs were added, according to ADP, while markets expected to add 144,000 jobs.
According to analysts at Bank of America Securities, in a note dated September 5, the dollar sell-off last month emerged in a historical context.
The US currency has since stabilized, however, despite significant weakness, the US bank still sees three reasons to maintain the downtrend of the dollar index (DXY).
The bank said that after similar bouts of downward breakouts of the DXY, the index tends to continue its downtrend.
In the last 3 isotopes, the DXY fell on average by another 4% before hitting the bottom. The extension of this analysis to the USD/Ten pairs suggests that a continuation of the downtrend of the US dollar is more likely against the EUR, GBP and AUD than the Swedish krona, Norwegian krone and Swiss franc in the group of ten pairs.
While the US dollar index hit a new year-to-date low in August, broad nominal and real weighted indices for US dollar trade remained at fourth-quarter 2022 levels, suggesting that the US dollar remains overvalued.
The sell-off in 2024 was concentrated in EUR/USD and other European currencies, diverging the USD from other US dollar indices.
The bank also noted that the 10-year US Treasury yield is inclined to decline after the first Federal Reserve cut, while global financial conditions are expected to ease further.
“The U.S. dollar may see further weakening as other central banks, particularly those that cut interest rates before the Federal Reserve, can now allow the Fed to do some of its work and indirectly support global economies outside the US,” the bank added.
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