J.P. Morgan Private Bank’s Global Investment Strategy team expects the United States dollar to weaken further, despite a sharp rally in United States equities.
“Despite the S&P 500’s impressive rally, the United States dollar continues to retreat, underscoring a shifting global macro narrative,” said Julia Wang, Global Market Strategist at J.P. Morgan Private Bank. “With foreign capital inflows lagging and FX hedging activity on the rise, structural pressures are mounting.”
Since the suspension of Liberation Day tariffs on 8 April, the S&P 500 hasrisen by more than 20%. Yet over the same period, the dollar has declined to fresh cyclical lows. According to Wang, the currency remains between 5–15% overvalued on long-term valuation models, with further depreciation likely as “cyclical convergence and capital reallocation trends play out”.
Capital flows and hedging pressure
The United States runs an annual trade deficit of around USD 1 trillion, which must be offset by portfolio flows, foreign direct investment and other capital inflows to avoid depreciation pressure. Recent figures suggest the balance is slipping. “Foreign inflows to United States capital markets over the past three months are consistent with an annualised pace of just USD 100 billion and lower than foreign inflows to ex-United States markets,” Wang said.
FX hedging ratios, which had previously fallen as investors grew comfortable with dollar strength, are now being reassessed. “Recent years of persistent United States dollar strength and negative correlation between the greenback and risk assets saw foreign investors reduce the degree to which they FX-hedged their holdings of United States assets,” the team wrote. “Those prior trends are now in question.”
Some institutional investors have already moved. “We are already seeing some of the quicker-moving institutional funds in Europe take action; the Danish pension fund and insurance industry, for example, has increased its United States dollar hedge ratio by 12%pts year-to-date, back to near the highest levels seen over the past 10 years.”
Valuation strain and rate convergence
Historically, the performance of the United States dollar has tracked the difference in interest rates between the United States and the rest of the world. While that link has weakened in recent months, the underlying convergence remains in play.
“That relationship has been less stable since April as the asset allocation and FX-hedging decisions of global investors have become more important drivers,” the note said. “However, United States yields have resumed their convergence toward those of major peers in recent weeks, providing another impetus to drive the dollar lower.” J.P. Morgan continues to see the currency as fundamentally stretched. “Even as the United States dollar makes new lows for the cycle, it remains 5–15% overvalued on long-term valuation metrics,” Wang said.
