Bank of America judges that the upcoming Federal Open Market Committee meeting is unlikely to represent a pivotal turning point for the U.S. dollar under the current circumstances. The firm notes it does not expect any immediate policy changes from the Fed, and it points to growing geopolitical uncertainty as a persistent force propping up the dollar.
According to the bank's assessment, remarks from Fed Chair Jerome Powell are expected to reflect this heightened uncertainty. Any indication from the chair that would tilt the balance of risks on inflation or growth is likely to be rapidly interpreted and priced by foreign exchange markets, the bank said. In this environment, the dollar’s path should be chiefly responsive to headlines rather than to a substantive policy shift.
Bank of America highlights oil markets as a principal driver of dollar moves. The firm argues that, as long as current events continue to exert upward pressure on oil prices, the dollar will face upside risks, especially against currencies that are more exposed to terms-of-trade shocks. Currencies singled out as vulnerable to this dynamic include the euro, the British pound, the Japanese yen, the Swedish krona, the New Zealand dollar and the Swiss franc.
By contrast, the bank says currencies that are relatively insulated from oil price fluctuations - specifically the Australian dollar, the Canadian dollar and the Norwegian krone - will see any dollar gains hinge more on overall market risk sentiment than on oil alone.
Bank of America also notes that a global move higher in interest rates has taken place, and that the Federal Reserve now stands apart among G10 central banks as the only one not currently priced for some probability of a rate hike this year. The bank argues that further market adjustments that remove expectations of Fed cuts, particularly in the context of persistent global growth worries, would continue to lend support to the dollar.
In sum, the bank sees the dollar’s near-term trajectory as being shaped primarily by geopolitical headlines and oil market dynamics, with Fed communications likely to be quickly absorbed by foreign exchange markets given the absence of imminent policy change.