USD: sustained medium to long-term weakness - Wells Fargo

Analysts from Wells Fargo, predict sustained medium to long-term weakness in the US dollar, amid convergence in monetary policy. 

Key Quotes: 

"The greenback declined this year, although it has recovered somewhat in recent months. The Federal Reserve’s major currency index, a measure of the dollar on a trade-weighted basis against a basket of global currencies, is still down more than 5 percent this year.” 

“Central banks had been on a path of monetary policy divergence over the past several years. The Fed has gradually raised rates, while other central banks have remained firmly accommodative. However, over the past year we have seen a slow pivot toward monetary policy convergence. Global growth has surprised to the upside, and many central bankers have subsequently tightened policy amid firming economic conditions and slowly increasing inflation. The Bank of Canada hiked rates twice in recent months by a total of 50 bps, and the Bank of England reversed its post-Brexit rate cut in November, raising its target rate 25 bps.”

“The path to convergence will likely be a slow one, as some countries have yet to fully reverse dovish policies. The European Central Bank is still dialing back monthly bond purchases, and the Bank of Japan’s easing program will likely remain in place for the foreseeable future.”

“Although tightening among the world’s central banks will likely be gradual, our currency strategy team predicts sustained medium to long-term weakness in the U.S. dollar. Both emerging and advanced market currencies should see gains against the dollar as global monetary policy slowly converges over the coming years.”