USD: What a strong dollar means for the US economy – BofA

Bank of America Global Research discusses the potential impact of the strong USD on the US economy.

“An
emerging question is whether US policymakers, especially the Fed, will
be sensitive to spillover of a strong USD to the rest of the world. History
tells us their focus will remain firmly on domestic policy objectives
unless there is some blowback to the US economy or financial markets,” BofA notes.

“For a large,
relatively closed economy, domestic demand rather than net exports will
be the swing factor for Fed policy. Tighter financial conditions,
including a strong USD, can weigh on growth but with significant lags.
Finally, a strong USD is a drag on corporate earnings but the Fed does
not seem especially concerned about an equity sell-off from lofty
valuations,” BofA adds.

Separately, MUFG Research maintains a bearish and short exposure on GBP/USD targeting a move towards 1.0450.

“The UK rate market is expecting the BoE to deliver a larger 125bps
or 150bps hike at their next policy meeting on 3rd November, and then to
keep raising rates to a peak next year of closer to 5.75% which would
be around 100bps higher than expected for the Fed. At the same time, the
pound is still vulnerable to the ongoing tightening in global financial
conditions given the UK runs a sizeable current account deficit. The
ONS revealed at the end of last week that the UK’s underlying current
account deficit when one strips out precious metals averaged around 5.7%
of GDP during the first half of this year,” MUFG notes.

“In these circumstances, we are happy to fade the current
rebound and continue to look for cable to head lower again heading into
year-end,” MUFG adds.