Will the value of the US dollar fall further?

Over the course of the pandemic, the US dollar (USD) gained in value as investors harboured the currency amid global economic uncertainty. This appreciation continued as the Federal Reserve started lifting interest rates aggressively to combat inflationary pressures. Despite higher interest rates, economic activity in the US remained strong, adding to reasons to buy the US dollar. From 2020 to 2022, the US dollar appreciated by 6%, relative to a basket of currencies.

However, in the last six months, the currency has depreciated against other major currencies. One driver of this is the rebound in global economic momentum, reducing investors’ preference towards safer currencies.

In addition, there is anticipation that the Fed will lower interest rates at a faster pace than other central banks. Indeed, two-and-a-half years after the Fed first lifted interest rates in this cycle, it opted to cut interest rates by half a point (0.5%) in September 2024, driven by concerns over the strength of the labour market, pushing down the value of the currency. So far in Q3 the dollar has lost around 2.5% against a basket of currencies.

What is the outlook for the future?

Looking forward, we expect further dollar depreciation. Our end-2025 forecasts are for $1.37 to the pound, which is a weakening in the dollar relative to sterling, from the current spot rate of $1.31. Part of that is a USD story, as the Fed's easing cycle and the slowing in economic momentum weigh on the currency. But, the strength of sterling also contributes to the forecasts, with the economic backdrop in the UK looking brighter than in 2023.

We expect the dollar to weaken against the Euro too, largely due to interest rate dynamics, but also as the euro becomes more attractive as the eurozone economy is expected to improve in 2025.

One key factor that threatens to alter our dollar view is the outcome of the US Presidential election on 5 November 2024. Considering that there is no clear front-runner in the race, with polls suggesting a very tight contest, for now we have conditioned our forecasts on an unchanged policy stance. There are risks to the dollar, depending on who sits in the White House and the makeup of Congress.

Some Investec clients receive part, or all, of their income in US dollars and our FX Dealers are helping to manage market fluctuations. “At the moment, clients are actively discussing how to hedge their US dollar exposure,” says Private Client FX Dealer David Bimpson. “For some, setting the current exchange rate for use up to 24 months in advance is an option as it offers certainty. We provide solutions on a case-by-case basis, and we’d recommend that individuals get in touch with us early so we can help them to find an appropriate strategy for their needs.”

This article is for general information purposes only and must not be used or relied upon as professional advice. Contact a professional adviser if you need financial advice.

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