The Commonwealth Bank says US dollar weakness will continue for some time yet

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If you think that recent weakness in the US dollar is over, think again. The recent trend is likely to continue, particularly against the euro and Canadian dollar.

That’s the view of the Commonwealth Bank’s (CBA) currency strategy team, led by Richard Grace, who say the dollar is is likely to remain in the doldrums looking 18 months ahead.

Here’s the CBA’s latest currency forecasts.

Source: Commonwealth Bank

“Our forecast for USD depreciation is playing out well,” the bank says.

“The factors driving USD depreciation have not changed. The prospect of the next move in interest rates being higher in countries “other” than in the US due to their improving economies and moderately rising inflation will have a greater appreciating impact on their exchange rates.”

Grace and his team say that while further rate hikes from the Fed are already priced in, those from many other major central banks are not, leading them to the view that “monetary policy convergence between the US and the rest of the world over 2018 will dominate exchange rate direction over 2017-18”.

While its base case is for further US dollar weakness, it does have one caveat on that view.

The key risk to the USD forecast is the Trump Administration is able to get US company tax cuts passed through the US Congress,” it says.

“If this development occurs, then the USD will no longer depreciate, but lift quite significantly.”

It’s likely that many will be watching developments on proposed US healthcare reforms for a guide as to whether or not that’s likely to occur.

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