Citi Predicts Short-Term Dollar Dip, Maintaining Bullish Medium-Term Outlook
The US dollar, despite recent gains, faces potential headwinds in the short term, according to a recent analysis by Citi. While the Dollar Index, a benchmark measuring the greenback against a basket of six other currencies, has appreciated by nearly 3% this month, reaching 106.917, Citi analysts suggest that the rally may be losing steam. They anticipate a tactical negative asymmetry for the USD in the near term, primarily driven by diverging expectations regarding the European Central Bank (ECB) and the Federal Reserve (Fed) monetary policies, seasonal factors, and current market positioning.
A key driver of the anticipated dollar dip is the shift in market expectations for December policy decisions by the ECB and the Fed. Markets are currently pricing in greater interest rate cuts for the ECB than for the Fed, a dynamic Citi views as potentially excessive. While the ECB has adopted a more dovish tone recently, their primary message continues to advocate for steady and gradual cuts. Conversely, the outlook for the Fed’s December decision remains uncertain, with market expectations split between no change and a 25-basis-point cut. Citi believes a 25-basis-point cut is more likely, aligning with the Fed’s forward guidance toward an easing path.
Seasonal factors also contribute to Citi’s short-term bearish outlook for the dollar. Historical data indicates that the dollar index has weakened in eight out of the last ten Decembers, often coinciding with weaker economic data surprises. This seasonal trend lends further support to the possibility of a 25-basis-point rate cut by the Fed in December.
Despite these short-term challenges, Citi maintains a constructive medium-term outlook for the US dollar, at least through the first half of 2025. The bank believes that US tariff policy and the potential for US growth outperformance will bolster the greenback in the medium term. This positive outlook stems from the expectation that tariffs will shift global trade dynamics in favor of the US and the belief that the US economy will outperform its global counterparts, making US assets more attractive to investors. This anticipated growth differential further strengthens the case for a stronger dollar.
Citi’s analysts view the anticipated short-term dollar weakness as a strategic opportunity. They recommend using any December dips in the dollar as a chance to re-enter short positions on the EUR/USD pair. This strategy reflects their belief that the euro’s strength against the dollar will be temporary, and the underlying fundamentals favor a stronger dollar in the medium term. Essentially, they are suggesting buying the dollar on dips, anticipating a resurgence in its value.
In summary, Citi presents a nuanced perspective on the US dollar’s trajectory. While acknowledging the current strength and potential for short-term weakness driven by monetary policy expectations, seasonality, and market positioning, they maintain a bullish medium-term outlook based on US trade policy and growth prospects. This dual perspective highlights the dynamic nature of currency markets and the importance of considering both short-term and long-term factors when making investment decisions. The bank’s recommendation to capitalize on potential December dips in the dollar underscores their conviction in the greenback’s resilience and future strength. This approach allows investors to potentially benefit from short-term market fluctuations while positioning themselves for the anticipated medium-term dollar appreciation.
