📝USD to Depreciate In Near-Term On Portfolio Rebalancing: J.P. Morgan

Our FX research team has noted that Norway, Switzerland, Canada, Sweden, the UK, Australia, and Israel have the largest US equity holdings as a share of their own GDP, suggesting capital repatriation could be most consequential for their currencies.

Meaningful capital repatriation or hedging could put pressure on the USD to depreciate somewhat from an elevated entry point. Figure 9 shows an equal-weighted real exchange rate index of the USD versus the other G10 currencies. In the medium- to long-run, currencies have generally mean reverted in real value, though mean reversion typically occurs over the course of several years to a decade.

In the near term, we ultimately see the most likely outcome as being a modest USD depreciation due in part to a bit of portfolio rebalancing and more currency hedging. If we are right in our view that capital outflows from the US are likely to be quite modest, that seems unlikely to be a driver of significant near-term dollar weakness. In the near term, a cyclical USD moderation warrants a rebalancing of FX hedges in any case. - J.P. Morgan