Relax, The Dollar's Bull Market Is Still Intact - BBH

New York (July 26)  The U.S. dollar’s downtrend and steady decline since the first quarter are not enough to faze analysts at this major NY-based bank.

 According to Brown Brother Harriman’s (BBH) latest email to clients, the dollar is still in a bull market.

“We identified the main economic driver of the dollar bull market as divergence, and we see it still being intact,” they wrote.

The divergence the analysts are referring to is the growing discrepancy between the Federal Reserve’s and the European Central Bank’s monetary policies, which bodes well for the dollar.

 “[W]e expect the Fed's balance sheet to shrink by $30 bln in Q4, $60 bln in Q1 18 and $90 bln in Q2 18 for $180 bln reduction by the middle of next year. During this time, we expect the ECB's balance sheet to expand,” they said. “By the middle of next year, we suspect the Federal Reserve will hike rates 2-3 times, while the ECB leaves its deposit rate at minus 40 bp.”

But aside from deviating monetary policies, the analysts said they are reluctant to abandon their bullish dollar outlook because the technicals remain solid.

“Although the dollar's pullback this year is more than we expected, regarding retracements, it is still quite modest,” they wrote. “The dollar has depreciated, but it has barely met some minimum technical retracements that are common corrections in bull markets.” 

The dollar continues to trade near multi-month lows against major currencies like the euro and the Japanese yen, with the U.S. dollar index last trading at $94.18.

However, even if sentiment seems to be swinging in favor of Europe over the U.S. right now, the analysts said it is still too “premature” to abandon their bullish dollar forecast. 

“The eurozone continues to grow above trend, but the momentum appears to be stabilizing. Macron's election in France spurred several months of good feeling, but the honeymoon is over,” they wrote.

“It is true that political uncertainty and the unconventional U.S. administration weighs on sentiment.  However, ultimately, we think monetary policy and the broader economy is more important.”

“[W]e are concerned that investors may be too negative the US…It is true that political uncertainty and the unconventional US administration weighs on sentiment.  However, ultimately, we think monetary policy and the broader economy is more important.”

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