Deutsche Bank Forecasts Continued Gradual Decline for US Dollar

The U.S. dollar is expected to continue its gradual decline through the end of the year, according to a recent foreign exchange outlook from Deutsche Bank. The firm noted that currency markets have remained relatively calm despite significant moves in commodities and interest rates so far this year, a pattern it anticipates will persist.

Currency Pair Outlook

Deutsche Bank's strategists see the dollar extending its slide against the Chinese yuan and expect the Japanese yen to continue its recent outperformance on currency crosses. They identified currencies in "surplus Asia" as the most significant valuation outliers in the global FX market.

For the closely watched EUR/USD pair, the bank forecasts it will remain range-bound. Analysts cited several countervailing factors influencing the pair:

• Support for the Euro: Resilient global growth and "sizeable dollar tail risks" are expected to prevent further weakness in the common currency.
• Cap on the Euro's Upside: Continued rate hikes from the U.S. Federal Reserve and high energy prices are seen as limiting potential gains.

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Shifting Strategy and Risks

While Deutsche Bank still favors carry trades, its stance has shifted from broadly bullish to more selective. Analysts noted that positioning has become more stretched and real rates in emerging markets are compressing against the dollar.

Reflecting this cautious turn, the bank has added some selective long positions on the U.S. dollar against emerging market currencies to its portfolio for the first time in a while. The success of this more cautious approach, the firm noted, may ultimately depend on geopolitical developments, specifically whether a peace agreement is reached in the Middle East by year-end.