JP Morgan’s FX strategy team expects the US dollar to face mild downward pressure in the near term, driven by portfolio rebalancing and increased currency hedging—particularly from countries with large exposure to US equities.
In a research note, the bank identified Norway, Switzerland, Canada, Sweden, the UK, Australia, and Israel as having the largest US equity holdings relative to their own GDP. “Capital repatriation could be most consequential for their currencies,” the team said, flagging these economies as potentially more sensitive to shifts in global asset allocations.
While the bank does not anticipate large-scale capital outflows from the US, it sees “a modest USD depreciation” as the most likely outcome in the near term, partly due to rebalancing activity and a shift toward more active FX hedging strategies.
An equal-weighted real exchange rate index of the dollar against other G10 currencies suggests the USD remains elevated on a historical basis. “In the medium to long run, currencies have generally mean-reverted in real terms,” JP Morgan noted, though it cautioned that such adjustments typically unfold over several years or even a decade.
“Even if capital outflows from the US are quite modest, a cyclical moderation in the USD still warrants a rebalancing of FX hedges,” the note concluded.
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DXY (a USD index) update:
I didn’t draw in anything, but a quick eyeball suggests to me the drop has work to do around here.
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