Bank of America Global Research discusses the USD outlook and flags a scope for stabilization over the next 2-3 months.
"Attention has rightly focused on the sharp USD selloff that has gathered momentum throughout July. We quantify the recent move as a -2 standard deviation event and explore prospects for stabilization over the next 2-3 months based on history.
We think a sizable reduction in FX risk premium has likely taken place this year. This explains the meaningful USD depreciation seen on most G10 pairs despite core risk assets (namely the US equity market) merely retesting prior highs," BofA notes.
"Looking forward, we are skeptical that low FX risk premium can persist given high global economic uncertainty, though continued robust official sector response admittedly could cause USD to undershoot. Still, a persistently wide US growth advantage suggests that medium to longer-term monetary policy risks are skewed toward tighter US policy on a relative basis despite a presently dovish Fed," BofA adds.