Qatar National Bank “QNB” suggested that the dollar move towards more “moderate” levels, with the support of the process of controlling the financial conditions, additional monetary facilitation, and the new American administration that will focus on addressing the imbalances.
In his weekly report, QNB considered that there is a limited area for a further increase in the value of the US dollar beyond the current levels.
The report pointed to the great fluctuations in the main foreign currency markets in recent months. In fact, the US dollar index, “DXY”, a traditional indicator that measures the value of the US dollar against a weighted basket of six main currencies, witnessed a remarkable increase against the backdrop of Donald Trump’s victory in the American general elections in November 2024.
The US dollar index has increased by almost 6 percent since September 2024, and this is a rapid and unusual move in this category of assets, according to the aforementioned index, which closely follows the periodic returns of American stocks that are more risk and fluctuations.
Qatar National Bank pointed out that with the US dollar index exceeded the critical levels that we witnessed in September 2023, amid the “peak” tightening measures taken by the Federal Reserve Bank “Bank of the American Carpeals”, analysts and investors began discussing the expected trend of the US dollar.
According to the report, many believe that the US dollar should have a good support from increasing American definitions on the main commercial partners by Trump, the power of the US economy, and the possibility of the Fed Bank to dispose of more than “caution” towards monetary policy more than its counterparts, on The background of high inflation in the United States.
The report said that analyzes indicate that there is an exaggeration in the US dollar assessments that may need to be modified. One of the common methods of considering currency “evaluations” is to analyze the likely exchange rates in trade and amended by inflation, i.e. real actual exchange rates, and compare them with their long -term average or historical standards.
This real actual exchange rate measure is more powerful than traditional foreign exchange rates because it picks up changes in trade patterns between countries in addition to economic imbalances in the quality of inflation and its differences.
The real actual exchange rate data for December 2024 indicates that the US dollar is indeed the currency with the largest exaggeration in the evaluation in the developed world, with its evaluation increases by 21.8 percent of its theoretical “fair value”.
“QNB” was based on two factors on the potential opposite winds of the dollar in the Mediterranean, the first of which is that the transformations in the financial position of the major advanced economies may lead to narrowing the growth differences and interest rates between them and the United States.
In recent years, the United States has been bolder than its counterparts in the application of expansionary financial policies, which strengthened its economic performance, but in return, its deficit pushed it to about 7 percent of GDP.
Currently, the report said that as the new American economic team is ready to conduct a major financial seizure to bring the deficit closer to 3 percent, while other advanced economies tend towards more expansive measures, the precedence of growth in the United States may diminish. Ultimately, the growth difference will reduce the preference of other currencies over the US dollar.
The second factor on the report was represented despite the uncertainty about the interest rate path in the United States and the popular opinion that the monetary facilitation “is over” in the United States, we believe that the Federal Reserve will implement at least two other interest rates in 2025.
While strong growth and “fear of inflation” resulting from the measures carried out by Trump affect the expectations about the following moves of the FBI regarding monetary policy, the most comprehensive view of the leading inflation indicators indicates that there is no reason to panic or sudden end of monetary facilitation.
The report continued: “The great declining trend of periodic inflation, in addition to the great slowdown in economic activity and the most flexible labor market, would support more discounts on interest rates until they reach neutral levels, or about 4 percent.”
This would affect the difference in interest rates between the United States and other economies, which reduces global financial conditions and pay more capital to uninterested assets in US dollars.