Qatar National Bank / QNB / the dollar moved towards more “moderate” levels, with the support of the procedures for controlling financial conditions, additional monetary facilitation, and the new American administration that will focus on addressing the imbalances.
In its weekly report, the bank saw a limited area for a further increase in the value of the US dollar beyond the current levels.
The report pointed out that there are a few indicators that reflect the trends of the global macro economy as do currency rates, as this applies in particular to the deep and liquid markets of the major foreign currencies in advanced economies, such as the US dollar, Japanese yen, the euro, the Swiss franc, and the pound sterling.
Foreign currency exchange rates depend on capital flows, which are affected by the immediate reactions and expectations related to the desire to risk, relative economic performance and interest rates.
The report pointed out that the main foreign currency markets have witnessed great fluctuations in recent months, as the US dollar index (DXY) has increased by nearly 6 percent since September 2024, against the backdrop of Donald Trump’s victory in the US presidential elections in November 2024, indicating that this rapid move in the US dollar reflects unusual fluctuations, which coincide with the fluctuations of periodic returns to American stocks.
The report pointed out that the US dollar index exceeded the critical levels that we witnessed in September 2023, in conjunction with the “peak” stretching measures taken by the Federal Reserve. As a result, analysts and investors began to discuss the expected trend of the US dollar.
A number of economic analysts and investors believe that the US dollar should have good support from increasing American definitions on the main trading partners by Trump, the power of the US economy, and the possibility of the Federal Reserve Bank to dispose of greater caution towards monetary policy compared to its counterparts, against the background of high inflation in the United States.
The report considered that there is an exaggeration in the US dollar assessments, but the analyzes indicate that these assessments may need to be modified, as the real actual exchange rate data for December 2024 shows that the US dollar is the most exaggerated currency in the evaluation between the main currencies in the developed world, as its evaluation increases by 21.8 percent over its theoretical “fair value”.
The report considered that there is an area for a different scenario that goes beyond the idea of the “strong dollar” in the long run, pointing to workers who support his point of view on the possible opposite winds of the dollar in the medium term.
The first factor explains that the transformations in the financial position of the major advanced economies may lead to narrowing the gaps in growth and interest rates between them and the United States, pointing out that in recent years, the United States has been more daring than its counterparts in the application of expansionary financial policies, which helped enhance its economic performance. However, on the other hand, this resulted in an increase in the deficit to about 7 percent of GDP.
The report noted that at the present time, with the new American economic team’s willingness to carry out a major financial control process to reduce the deficit to 3 percent, while other advanced economies tend to adopt more expansive measures, the precedence of economic growth in the United States may begin to decline. In the end, reducing the difference in growth will lead to the preference of other currencies over the US dollar.
With regard to the second factor, the report indicated that despite the uncertainty about the interest rate of interest rates in the United States and the belief that the monetary facilitation is “over”, the report believes that the Federal Reserve will implement at least two other interest rates in 2025.
The report concluded that the great trend of periodic inflation and slowdown in economic activity and the flexible labor market in the United States may lead to more interest rate discounts until they reach neutral levels, which affects the interest rate difference between the United States and other economies, and thus contributes to facilitating global financial conditions and stimulating the flow of capital towards uninterested assets in US dollars.
