Even as rate-cut bets slip, dollar likely to tumble amid fiscal, economic strains
Investing.com--The falling odds of a December rate cut have stoked bets on the dollar flexing its muscles, but Scotiabank Economics points to diverging central bank policies and growing fiscal as well as economic strains that will likely cut into the greenback’s strength.
“We remain USD bears, looking to broad weakness through the end of our forecast horizon as our outlook continues to incorporate significant Fed easing while most other central banks maintain neutral policy settings,” Scotiabank said in a recent note.
Scotiabank expects the Fed to deliver 100 basis points of rate cuts over the coming year and the Fed holding its key target rate at 3.00% for the foreseeable future thereafter. The dovish forecast pales in comparison to current market pricing of around 16bps of easing risk by the end of this year and a little more than 80bps of easing in total through the end of 2026. The odds for a December rate cut fell below 50% on Thursday.
The uncertainty over the rate path and fiscal policy ahead could, however, provide short-term USD support. "Uncertainty here could persist, sustaining support for the USD in the short run.” Scotiabank added.
Still beyond bets on significant easing from the Fed, Scotibank bank points to the weakness in the economy and signs of credit risk that add to worries about the economic outlook. "While growth trends appear to be holding up, prospects remain uncertain and some trends in key data reports (such as the ISM series) remain sluggish," it said. Credit risks, soft housing market trends and uneven consumer spending may also muddy the outlook, while a big pull back in equities are a major threat.
"Lofty equity market valuations are also an area of concern as any significant setback in risk assets could add to economic headwinds via the confidence and consumption channels," Scotia bank added.
The bank’s revised forecasts put the EUR/USD at 1.22 in late 2026 and 1.24 by the end of 2027, while the USD/CAD is seen slipping to 1.30 Canadian dollars by the end of 2027.
