The US Dollar has rallied strongly this month as investors sought safety amid geopolitical tensions and priced in a more hawkish Federal Reserve.
Julius Baer believes these factors should continue to support the Dollar in the short term, but warns that the longer-term outlook is becoming less favourable.
The bank argues that the current rally has been driven by a combination of safe-haven demand, higher US interest-rate expectations and continued investment into America’s AI sector. The United States’ position as a net energy exporter has also insulated the economy from higher oil prices.
However, Julius Baer believes these cyclical supports are masking more persistent structural challenges.
According to the bank, widening fiscal deficits and ongoing current-account imbalances are likely to re-emerge as headwinds for the Dollar once geopolitical tensions begin to fade.
That outlook leads Julius Baer to remain constructive on several alternatives to the Greenback. It believes the Euro should benefit despite the Eurozone’s softer growth outlook, while the Australian Dollar and Norwegian Krone are supported by attractive yields, commodity exposure and relatively hawkish central banks.
The bank is more cautious on Sterling. Although UK interest rates remain comparatively high, Julius Baer believes fiscal concerns and political uncertainty continue to limit the Pound‘s upside.
Within emerging markets, the bank continues to favour Latin American currencies, arguing that high carry returns should continue to attract investors, although country-specific fiscal risks remain an important consideration.
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