LIVE MARKETS-Further dollar weakness may depend on summer's economic data

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FURTHER DOLLAR WEAKNESS MAY DEPEND ON SUMMER’S ECONOMIC DATA

The U.S. dollar has tumbled by around 9% so far this year on concerns about U.S. growth and continuing foreign investment in the United States.

A continued drop may now depend on weakening economic data over the coming few months, according to Bank of America foreign exchange analysts Athanasios Vamvakidis and Claudio Piron.

The U.S. economy has so far staved off expectations that it was facing an imminent downturn.

“We must acknowledge the positives,” the analysts said. “Market discipline seems to be working this year, keeping US policy implementation away from initial extreme announcements, including on trade policy. DOGE and plans for substantial spending cuts are out. Tax cuts can support long-term growth."

That said, there are likely more negative than positive market drivers on the horizon, they said. Policy uncertainty remains, which may dent companies’ hiring and investment plans. Tariffs will likely rise and the market is concerned about loosening fiscal policy with deficits already high.

Sticky inflation, meanwhile, will curb the Federal Reserve’s ability to cut rates unless the economy weakens enough to address “credibility concerns.” Migration has collapsed and demand is likely to fall after a first quarter increase ahead of tariffs, the analysts added.

Some high frequency indicators are also raising red flags, the bank notes, including a downward trend in ISM data this year. The Institute for Supply Management said on Monday that its manufacturing PMI edged down to a six-month low of 48.5 last month from 48.7 in April.

The weekly Dallas Fed economic index has also resumed a downward move following a surge just ahead of the April 2 tariff announcements.

Ultimately, “we believe US data during the summer will provide the final verdict for the USD. If somehow the US economy keeps defying gravity, we would expect investors to start ignoring the policy noise and go back to buying US assets, supporting the USD; US exceptionalism would be back. However, if the US economy has a proper landing, we would expect the USD to weaken further to new lows for the year,” Bank of America said.

(Karen Brettell)

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