KUALA LUMPUR (July 5): Fitch Solutions Country Risk and Industry Research said that bullish drivers of the US dollar (USD) remain in place, but could start to fade over the coming months, which would see the USD start to weaken in the second half of 2022 (2H22).

In a note on Monday (July 4), the firm said much will depend on the trajectory of inflation and interest rates as monetary policy will likely be the most important short-term driver of the USD.

“Since late 2021, our core view at Fitch Solutions has been that the US dollar would strengthen in 1H22, and then weaken in 2H22.

“We maintain that view, but with two caveats.

“First, calling a top in markets is always challenging, and second, the USD could remain bid for slightly longer given that the US Federal Reserve (Fed) has become more hawkish than we or the market initially expected and that recession risks have risen,” it said.

Fitch Solutions said the US dollar index (DXY) appreciated by 9.2% in 1H22, and that it will remain bid within a broad uptrend over the short term, driven in large part by the hawkish Fed and ongoing risk aversion.

“That said, two factors could see the USD reverse sooner than we believe, including a peak in inflation, which would lead to even a slightly dovish pivot by the Fed and/or a pickup in risk appetite,” it said.

Fitch Solutions said that from a technical perspective, the US dollar remains in a broad uptrend, and that in itself is bullish.

“As such, we highlight that only a break below 18-month trendline support around 99.0 would signal a more definitive trend change.

“That said, momentum indicators are looking somewhat toppy over the short term, and we note that a bearish divergence between the RSI (Relative Strength Index) and the DXY could signal a correction which, if large enough, could catalyse a large move back to support, and would mark a correction of 6% to 7% from current levels.

“As such, while we maintain a slightly bullish bias, the technicals have weakened somewhat,” it said.