

Market Analysis
Bank of America Forex strategists have indicated that the overvaluation of the U.S. dollar is no longer a significant concern for investors, following a recent depreciation that has brought the dollar index (DXY) closer to its fair value. This is the first time since March 2024 that the DXY has approached this level.
BofA notes that while the dollar is no longer overvalued, it isn't "cheap" enough to trigger a strong move against it, suggesting a more balanced risk outlook in the near term.
Although analysts are bearish on the USD for the medium term, the recent sell-off has exceeded their expectations for 2024. This overperformance is partly due to a positive outlook for USD/JPY and the stabilization of macroeconomic risks in the U.S.
They advise caution on adding USD shorts at this point, as market positioning has become more balanced and immediate risks are now more evenly distributed.
BofA also notes that while some speculative positions, particularly in short-term carry trades, have been unwound, residual interest from exporters and institutional investors could still support the dollar.
“We continue to expect structural outflows from corporates and households, which are not driven by short-term rate differentials, to eventually weaken the JPY,” analysts said.
Meanwhile, China's economic situation remains crucial in shaping the dollar's outlook. Despite some divergence between the DXY and China-related market sentiment, analysts argue that China’s economic recovery—or lack thereof—continues to be a key factor.
If China had shown stronger growth signals, especially in the property market and credit expansion, the dollar might have faced greater downward pressure. However, with China’s property sector still contracting and credit growth sluggish, the potential for a significant negative impact on the dollar remains limited.
Paraphrasing text from "Investing" all rights reserved by the original author.