The US dollar has suffered a strong weakness and decline in the recent period, which led it to the levels of 100 against a basket of foreign currencies. However, BCA Research analysts confirmed in a note dated Monday that the US dollar index remains resilient and is expected to rebound in the coming months.
Analysts based this view on the global economic landscape, characterized by a decline in manufacturing and increased caution in financial markets, paving the way for the dollar’s recovery. Despite the decline in the US dollar, BCA research suggests that the globally dominant currency is still far from out of the game.
In 2024, global financial markets saw the US dollar weaken amid uncertainty in the broader economic environment. Global manufacturing, which had briefly stabilized earlier in the year, entered a renewed contraction. This setback is accompanied by weakness in oil and copper prices, key indicators of global economic activity.
In addition, various segments of global risky assets have failed to surpass their previous highs, suggesting deteriorating global growth conditions.
Moreover, liquidity conditions are shrinking. BCA research suggests that global dollar liquidity, defined as the sum of the U.S. monetary base and securities held in the Federal Reserve’s custody of foreign officials and international accounts, is declining.
This factor in the current decline has contributed to the strengthening of the dollar, as the dynamics of low liquidity play a role in stimulating dollar index levels.
“It is worth noting that tightening global liquidity in U.S. dollars — calculated as the sum of the U.S. monetary base and securities held by the Fed for foreign officials and international accounts — is usually positive for the dollar,” analysts said.
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This tightening is linked to global manufacturing, which is closely linked to dollar movements. As the global economy contracts, the US dollar often behaves counter-cyclically, rising in value as riskier assets incur losses.
The current situation bears some similarities with the bear market of the early 2000s. In the first phase of the 2000-2002 bear market, the US dollar appreciated while global stock markets, including emerging market equities, saw a sell-off.
If this pattern is repeated, the dollar could follow a similar path in the coming months, gaining strength during the early stages of the bear market.
The dominance of the dollar. Password
One of the main reasons BCA Research remains positive about the US dollar is the structure of the global financial system. The US dollar remains the dominant global reserve currency, with the majority of international transactions settled in dollars.
Moreover, in times of economic stress, investors often flock to safe-haven US assets, increasing support for the dollar.
“The widely trade-weighted U.S. dollar has not yet breached the threshold of the ascending channel,” analysts said.
The greenback continues to benefit from its safe-haven role, which should sustain demand, especially as global economic uncertainty persists.
Emerging market equities and currencies are closely linked to global growth. The Bank of Canada report suggests that a renewed contraction in global manufacturing is likely to lead to a decline in emerging market equities and currencies.
A stronger US dollar could increase these pressures by increasing the cost of servicing dollar-denominated debt on emerging markets, further hampering their growth prospects.
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