NEW YORK, Nov 16 (Reuters) – The U.S. dollar may have already hit its highest levels of the year given growing evidence of slowing inflation and a weaker labor market in the world’s largest economy, Barclays and Deutsche Bank wrote in research notes on Wednesday.
In addition to domestic factors, Barclays said the improving energy supply and demand situation in Europe as well as China’s reopening expectations are reason enough to write off some of the risk premium. which has supported the dollar this year.
Barclays advanced the decline of the dollar in the fourth quarter of this year, compared to its previous forecast for the first quarter of 2023.
Since late September, the dollar index has fallen about 8%.
The British bank also revised its end-2022 forecast for the euro/dollar to $1.03, from its previous estimate of $0.97.
“The upside risk to the euro is that gas and oil supplies will improve sufficiently that the possibility of shortages is no longer a risk factor limiting production,” Barclays said, adding that peace or a ceasefire -fire in the Russian-Ukrainian war would be another increase.
Deutsche, on the other hand, expects the euro to end the year at $1.05.
That said, the German bank noted that it still expects a choppy market for the dollar, with one major issue: the extent and speed of US disinflation, or a general slowdown in global price increases.
“For a strong dollar downtrend to start, we really need more confidence that US inflation – and by extension Fed Funds prices – are falling sustainably,” Deutsche wrote.
Deutsche tracks the shape of the US yield curve to determine the direction the dollar is heading. The bank said the US 5-year/30-year yield curve needed to steepen aggressively to start a strong downtrend for the dollar.
This curve has steepened since the end of September, with the gap currently standing at 4.4 basis points. (Reporting by Gertrude Chavez-Dreyfuss; Editing by Josie Kao)