Recently, Citibank's FX strategy team adjusted its short-term outlook for the US dollar, officially shifting to a bearish stance. This shift is primarily driven by a confluence of factors, including cooling market expectations for the Federal Reserve's monetary policy, political uncertainty surrounding the US midterm elections, and the US Treasury's expansion of long-term Treasury bond buybacks.
In its latest report, Citibank significantly lowered its forecast for the US Dollar Index over the next three months from 102.12 to 98.34. Following the news, the US Dollar Index fell to around 98.80 during Friday's Asian trading session, hitting its lowest level since mid-May.
The US Treasury recently announced it would double the scale of its buybacks of 10- to 30-year long-term Treasury bonds through November. While this move aims to reduce long-term borrowing costs, it has exerted direct downward pressure on the dollar in the short term. Citibank's analysis suggests that expanding buyback operations has suppressed US Treasury yields, thereby diminishing the investment appeal of dollar-denominated assets. Meanwhile, market concerns have grown that the US government might artificially suppress financing costs through policy measures, sparking fears of financial repression and further undermining market confidence in the dollar. Lowering interest rates by suppressing yields often comes at the primary cost of a weaker currency.
Given the current macroeconomic environment, Citibank advises investors to adjust their portfolios by using the dollar as a funding currency to invest in high-yielding emerging market currencies with promising prospects. The bank has also reversed its underweight stance on duration assets, citing greater downward pressure on the long end of the yield curve, and expects the Federal Reserve to hold interest rates steady at its next two policy meetings. Against this backdrop, Citibank recommends clients adopt a strategy of buying gold and selling the dollar, while unwinding previous steepener trades on the yield curve.
Even before the US Treasury announced the expanded buyback plan, the US government's financing pressures were already evident. In August this year, the auction yields for 10-year and 30-year US Treasury notes climbed to their highest levels since the 2000s, reflecting deep market concerns over long-term debt costs. As market traders scale back their bets on Federal Reserve rate hikes, the core logic that previously supported the dollar's strength is loosening. With the US midterm elections approaching in November, rising political uncertainty and the potential for contentious election results have also prompted investors to reduce their long dollar positions.
Regarding other major currencies, Citibank simultaneously raised its three-month forecast for the EUR/USD exchange rate to 1.1750. This adjustment is mainly attributed to market expectations that the European Central Bank may raise interest rates by 25 basis points in September, coupled with cooling investor expectations for Fed rate hikes. Currently, the EUR/USD exchange rate is trading around 1.17.
Despite the shift to a pessimistic short-term stance, Citibank has not altered its long-term outlook for the US dollar, maintaining that the US economic growth prospects remain superior to those of other major G10 economies, which provides underlying support for the dollar's long-term trajectory. However, the bank also highlighted potential risks to its bearish forecast. For instance, a US-Iran conflict could disrupt oil transportation through the Strait of Hormuz, and the massive capital expenditures triggered by the AI investment boom could both fuel inflationary pressures. These factors could force the Federal Reserve to pivot back to a hawkish stance, thereby boosting the dollar once again.
