Deutsche Bank becomes latest currency dealer to lower its dollar forecast 

Deutsche Bank on Thursday became the latest major player in the global currency market to lower its expectations for the U.S. dollar.

The call is a sign that Wall Street is coming around to the view that the Federal Reserve will wait until the second half of 2016 to raise interest rates again.

The revision comes after a spate of weak data about U.S. economic growth and the labor market. Friday’s jobs data showed U.S. employers created 160,000 jobs in April, far fewer than expected.

And recent readings on consumer spending and industrial production suggest that U.S. economic growth remains subdued in the second quarter.

However, while the team believes weakness in the dollar could be more pronounced than previously thought over the next several quarters, it does expect the buck to rebound over the long term as the Federal Reserve raises interest rates.

In theory, higher interest rates make a currency more attractive to investors by increasing the return on deposits held in that currency.

In a set of currency forecasts, a team of macro strategists at Deutsche Bank said they now see the euro at $1.05 at the end of 2016, and 95 cents at the end of 2017. The investment bank previously saw the shared currency at 95 cents and 85 cents in a set of forecasts released in March.

Deutsche Bank explained that the shift in its forecast for the euro-dollar pair was driven by two main factors. For one, the European Central Bank appears to have shifted away from using negative interest rates as its primary-policy conduit.

Also, fears about slowing growth in the developing world will likely stay the Fed’s hand. The central bank has highlighted slowing growth abroad as a concern in its monetary-policy statements.

“Fed pricing has overshot with the risks skewed towards at least one rate hike this year versus market pricing of one hike every twelve months,” the team said.

Dollar could fall as low as ¥101 in the near term

Meanwhile, the magnitude of the drop in the dollar against the yen so far this year has surprised many investors who believed the Japanese currency would weaken further as the Bank of Japan cut interest rates and continued to pump money into the financial system by buying increasingly large quantities of Japanese debt and other assets.

At Deutsche Bank, the strategists said they now believe the dollar-yen could fall as low as ¥101 over the next two quarters, down from a low of ¥105 from its previous set of forecasts, released in March.

Investors have pushed the yen higher so far this year as the Fed has lowered its expectations for the number of interest rate hikes expected this year. The perception that the BOJ’s loose monetary policy has hit a while has also contributed to the currency’s resilience, strategists said.

While the team didn’t make any material changes to its projections for the dollar-yen pair’s performance over the next two years, it did say that the drop in the dollar could accelerate if it breaches the ¥100 threshold. Such a move would likely cause large Japanese investors to sell more dollars in the futures market to brace for further yen strength.

Though the team did add that the risks that the BOJ might step in to try to weaken its currency would rise if the dollar falls below ¥100.

Most recently, the dollar USDJPY, -0.25%  bought ¥108.94.

Goldman abandons call for Fed rate hike in June

Last week, a team of economists at Goldman Sachs abandoned its call for the Federal Reserve to raise its benchmark interest rate in June. Afterward, a team of currency strategists said the dollar could come under more pressure in the near term than previously thought—though they maintained their view for the U.S. currency to rise 15% over the next two years.

Currency strategists at Citigroup have been gradually lowering their expectations for the dollar’s performance since the start of the year. Unlike Goldman and Deutsche Bank, the believe the euro and yen will continue to rise against the dollar over the long term.

In its latest round of forecasts, released on April 22, the currency team at Citigroup said it expects the dollar to weaken by 2% to 3% against its G-10 rivals.

Source: MarketWatch

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