Since we believe that we are headed for 75 bps cut by Fed in REMCY25 & another 50-bps cut in Q1CY26, we believe DXY weakness is here to stay. In fact, the weakness can accelerate now further. If our view is correct, the Fed cuts will be happening under a backdrop of rising YoY inflation which implies lower real policy rates. This implies lower DXY for longer at least till Q1CY26. We won’t be surprised to see even 90 levels tested on DXY by this time period but our first stop is 95. CMP is 97.85. Broad-based USD downtrend has also been re-established in Aug post the July NFP. The USD is currently in a downtrend in 7 out of the 9 USD/G10 pairs, with neutral trends vs JPY and CAD. In terms of short-term valuation, none of the G10 currencies are grossly overvalued vs the USD except for CHF. FOMC participants advocating for a more restrained pace of cuts than our baseline of three sequential 25bp cuts often note the contraction in labor supply as a reason to be less concerned. However, lower “breakeven” payrolls pace also implies a weaker potential growth rate (and lower short-term neutral), which is negative for the Dollar if it persists. Institutional governance issues, growth differentials as well as hedging requirements are other triggers for a weak dollar outlook. Our strongest bet is on JPY where we believe BOJ is set for a 25 bps hike in it's Oct meeting. Our target is 140 on JPY with SL at 152. CMP is 147. We are more bullish on GBP than EUR because rate differential wise GBP has a better chance against Dollar than Euro. Also, higher service inflation, better recent employment nos imply a slow BOE cut cycle and a higher terminal rate too. The next leg weaker in the dollar would need to come from the US side of the equation, with the next month pivotal. This could come from either (a) further softening in labour market data which culminates into the Fed turning dovish, and (b) further market concerns on Fed independence.
