The US dollar experienced a significant sell-off on Monday, falling more than 1% after the new US administration announced a “universal tariff plan”. Investors are wondering whether this could signal the start of a trend similar to 2017, when the dollar fell consistently during President Trump’s first year in office.
However, Bank of America (BofA) analysts believe that there are not enough reasons to declare the beginning of a downward trend in the US dollar.
The market’s immediate reaction sent the DXY index, which measures the dollar against a basket of other major currencies, falling to 108. This level is considered a short-term equilibrium for the dollar, especially after the Federal Open Market Committee’s aggressive stance. (FOMC) in December 2024.
The FOMC’s decision was described as “unabashedly hawkish contraction” in a BofA report dated December 18, 2024.
Looking ahead, the US dollar could strengthen again ahead of the December jobs report this Friday. BofA’s January 6, 2025 Labor Market Watch report suggests that a strong labor market could lead to a repricing of expectations for any Federal Reserve rate cuts in 2025.
Investors and market participants are now ready to focus on the upcoming labor market data to determine the future direction. It is expected that a strong jobs report could counter immediate bearish sentiment and support the value of the dollar in the near term.
To sum it up, while the recent sell-off has raised questions about the dollar’s trajectory, BofA says one day’s move is not indicative of a long-term trend.
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