Title: U.S. Dollar Outlook: Is the Worst Behind Us? Barclays Analysts Weigh In
Investing.com -- As the U.S. Federal Reserve approaches a crucial turning point in its tightening cycle, the impact on the dollar may soon reach its peak. Analysts at Barclays suggest that while further weakness in the dollar is possible, the worst of its depreciation is likely behind us. The evolving outlook for U.S. monetary policy, combined with global economic conditions, points to a more stable dollar in the months ahead as the Fed's rate-cutting cycle begins.
Over recent months, market participants have increasingly priced in the likelihood of earlier and faster rate cuts by the Fed. Real terminal rates have dropped significantly, indicating where the market expects the Fed's tightening cycle to end. Despite this shift in rate expectations, Barclays analysts believe that most of the dollar's depreciation has already taken place.
The U.S. Dollar Index, which tracks the dollar against major currencies, has seen a decline since mid-2023. However, the pace of further depreciation is expected to slow as the Fed's monetary tightening cycle nears its end. The dollar typically bottoms shortly after the first rate cut, leading to a reassessment of the economic outlook and potential stabilization or rebound of the dollar.
Barclays highlights several factors that could limit further dollar depreciation, including the possibility of a U.S. recession and geopolitical tensions. China's economic slowdown could also support the dollar, particularly against Asian and emerging market currencies. While some additional USD depreciation is forecasted in the near term, Barclays expects a modest extent of further weakness with a potential recovery as the Fed's rate cuts progress.
In conclusion, the U.S. dollar outlook is influenced by various factors such as U.S. monetary policy, global economic conditions, geopolitical tensions, and China's economic slowdown. Understanding these dynamics can help investors make informed decisions about their portfolios and prepare for potential shifts in the financial markets.