On Monday, Citi issued a note highlighting the potential for the U.S. dollar to strengthen, citing several factors that could play a role in the currency’s performance.
According to the firm, the dollar index (DXY), which measures the U.S. currency against a basket of other major currencies, has reached significant support levels in the range of 100.30-100.82.
This positioning presents what Citi views as an attractive risk/reward scenario for investors considering long positions in the dollar.
The bank’s analysis points to weakening economic data from the European Union and developments in the U.S. political landscape, including the upcoming elections, as elements that could skew in favor of a stronger U.S. dollar.
Additionally, historical data suggests that September is a month when the dollar typically performs well, with positive returns observed in eight out of the past ten years during this period.
Citi’s report also notes that risk aversion tends to drive investors towards the U.S. dollar’s safe-haven properties. This is especially relevant when equities and other risk assets underperform, which is common in the timeframe under discussion.
Furthermore, relative performance between the United States and other global economies, such as data momentum and two-year yield differentials between the U.S. and the G6 countries, supports the dollar, albeit to a lesser extent.
The approaching U.S. election is expected to increase market volatility, which Citi believes could be supportive of the U.S. dollar. They anticipate that this volatility will limit the upside potential for risk assets.
However, they also recognize that a dovish stance from the Federal Reserve could offset some of the upward pressure on the dollar.
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