Dollar struggles as bears look set to strengthen grip on soft landing bets

Investing.com – The dollar struggled to recover Monday after plunging to more than one-year lows last week as the bears look set to tighten their grip on the greenback, supported by growing bets for a less hawkish Federal Reserve as optimism that a soft landing for the economy is on horizon gathers pace.

The U.S. dollar index, which measures the greenback against a trade-weighted basket of six major currencies, fell by 0.10% to 99.51, following a plunge to more than one-year low of 99.26 last week.

That marked the lowest level seen in the dollar index since April 2022, and this downward trend could extend in the near term, Goldman Sachs said in a recent note}}, because “the same factors that weighed on this report look likely to be softer still in coming months, and the policy implications bring welcome relief to a number of corners of the market.”

The bank added, however, that the “overall dollar depreciation over the course of this year is likely to be shallow and subdued,” as inflation in other regions including the Euro area are also set to slow, reining in the need for hawkish monetary policy tightening.

Soft landing, less hawkish Fed strengthen bears’ grip on greenback

The selloff in the greenback has coincided with a drop in Treasury yields on bets that the Fed’s next rate hike, widely expected later this month, could be the final hike for this cycle.

The odds of a July hike are fully priced in, according to Investing.com’s Fed Rate Monitor Tool.

Recent data showing better-than-expected economic growth and a faster slowdown in inflation than expected have blunted the odds of a recession, or hard landing, adding further fuel to the fire of bets on a less hawkish Fed.

The probability that a US recession will start in the next 12 months stands at 20%, according to Goldman Sachs, that is down from its prior forecast of 25%. “[R]ecent data have reinforced our confidence that bringing inflation down to an acceptable level will not require a recession,” it added.

The strength of consumer spending, which has surprised many and makes up two-thirds of economic growth, has been highlighted by some as a driver of the soft landing narrative. 

"People made so much money in 2021, everyone still has plenty of money to spend, Zhiwei Ren, Managing Director and Portfolio Manager at Penn Mutual Asset Management told Investing.com's Yasin Ebrahim in a recent interview. "At this point, I think the economy is still strong...I don't see recession risk," Ren added.     

Dollar may still have some fight left ahead of Fed decision

Others, however, argue that the downward move in the dollar has extended too fast and too far as the Fed may want to follow through on its forecast for two more hikes to push back against eventual bets of a rate hike.

Traders are “marginally more likely to take a more cautious approach rather than pile on bearish bets against the greenback ahead of the FOMC," ING said in a note. This could help the dollar “reclaim some portions of recent losses,” it added.