USD will struggle to improve significantly from current levels – Scotiabank

The US Dollar (USD) closed lower over the week through Friday, its second, consecutive net weekly drop, and is starting the new week on the defensive again. Shaun Osborne, Chief FX Strategist at Scotiabank, analyzes Greenback’s outlook.

Some loss of bullish momentum apparent

The USD’s drift from the mid-February peak looks partly technical and partly fundamental. DXY gains stalled around (just a little above) the 61.8% retracement resistance of the late 2024 decline on the one (technical) hand while there have been some signs of slowing US activity on the (fundamental) other. 

The USD has been running a bit hot relative to my estimate of spread-driven fair value for some time, making additional USD gains versus the core majors harder to justify. Recall also that seasonal trends tend to be mostly USD-supportive in Q1 but turn against the USD in Q2/Q3. 

All else equal, I think the USD will struggle to improve significantly from current levels and that downside risks are starting to strengthen as the quarter winds down.