[LFX]

a) With the Fed likely being on hold for longer than most other Central Banks, the Dollar will be suffering from negative carry for some time.

b) Given the drop in US domestic demand, a weak Dollar helps rebalance demand towards exports.

c) Anecdotally, foreign investors remain still largely FX hedged on US assets, while US investors tend to remain less hedged on their overseas holdings. With rising asset values globally, this likely translates into hedge related net USD selling.

d) While the correction of US imbalances remains incomplete, foreign investors remain reluctant to invest more in the US (or to remove their FX overlay on existing investments).

e) With investment inflows into the US having collapsed in recent quarters, even the rapidly shrinking US trade deficit remains difficult to fund.

f) Rapid fiscal expansion undermines the Dollar’s reserve currency status.

g) With growing industrial activity and orders, corporates may once again embark on a round of seasonal hedging and push the Dollar lower into year-end.

However, most of these factors will reverse when the US has demonstrated sustainable progress in fixing its imbalances and returned to growth. Investors will come back, carry differentials will move in favour of the USD, and a more sustainable external and fiscal situation will once again boost the sponsorship among sovereign Dollar holders. Moreover, given the Dollar is quite cheap currently the valuation argument will further support investments in USD once the cyclical picture improves.