US Dollar to Trade Sideways Through Year-End, Bank of America Forecasts

The U.S. dollar is expected to trade sideways through the end of the year, despite markets pricing in aggressive Federal Reserve tightening, according to a recent analysis by Bank of America.

Dollar Strength Fades Amid Mixed Signals

In a Sept. 8 report, Bank of America strategists noted that the dollar has shown weakness ahead of the Federal Open Market Committee's (FOMC) September meeting, even as markets have priced in an approximately 85% probability of a rate hike following recent consumer price index (CPI) data.

Dollar sentiment has been deteriorating since the July FOMC press conference, where the Fed Chair's perceived lack of a clear plan to combat high inflation raised questions about the central bank's credibility. This was followed by a series of mixed signals, including dovish commentary from Fed officials, a strong August jobs report, and a U.S. Treasury buyback program aimed at lowering government bond yields.

Analysts also pointed out that the dollar has failed to rally on the back of rising energy prices, a factor that typically supports the currency. Pressure has also come from a broad repricing of policy expectations and yield curves among other major global central banks.

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High Bar for Hawkish Surprise

Bank of America argues that the market has already priced in a significant amount of Fed hawkishness, with expectations for more than three additional rate hikes already factored in. This creates a high bar for the Federal Reserve to exceed market expectations and for its policy to outpace that of other G10 central banks.

The bank's forecast calls for the dollar to remain in a range-bound or sideways trend for the rest of the year. The strategists did, however, note that volatility could be an exception in currency pairs involving the Japanese yen.