U.S. Dollar’s Rally Likely Nearing Its Peak, Barclays Says

(Bloomberg) — The dollar is likely to head higher in the coming months before weakening in the second half of the year as the outperformance of the U.S. economy fades and investors’ risk appetites improve, according to Barclays Plc.

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While tighter monetary policy, a resilient U.S. economy and demand for havens due to the Russian war in Ukraine should support the dollar in the short term, that may reverse as global growth improves, strategists Aroop Chatterjee, Ashish Agrawal and Themistoklis Fiotakis wrote in a note to clients Tuesday. Overvaluation of the greenback, crowded positioning and a “stretched” current-account deficit should also weigh on the U.S. currency in the second half of this year.

“We expect a stabilisation of risk appetite and extension of the global cycle to help reduce the USD’s safe haven bid and to narrow the U.S. relative outperformance story,” they wrote. “This is likely to generate a broader USD depreciation in the second half of 2022.”

READ: Market Gyrations Ease With Traders Recalibrating Russia Risk

The Bloomberg dollar index has climbed almost 5% in the last year as traders anticipated the Fed’s rate hikes. Russia’s invasion of Ukraine last month exacerbated that rise, with money managers turning to haven currencies as they prepared for the impact of higher energy prices, though the dollar gave up some of those gains over the past week.

The greenback also tends to weaken after the Fed’s moves are fully priced in to the currency.

“Fed tightening — the main driver of dollar strength — is getting increasingly in the price and history shows that once it gets fully priced in, other factors come into play,” Fiotakis said. “Looking past peak Fed pricing, the terms-of-trade boost for commodity exporters, the high-yield among many emerging markets and the sequencing of hikes among other major central banks will drive dollar depreciation from an expensive starting point.”

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