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Overvalued Dollar Faces Mounting Pressure Amid US Growth Fears and Policy Uncertainty

At the same time, the US dollar is being negatively affected, especially since its nominal effective exchange rate suggests the currency is overvalued. The US dollar is penalised by concerns over US growth, with an increased risk of stagflation taking hold in the United States. 

Overvalued Dollar Faces Mounting Pressure Amid US Growth Fears and Policy Uncertainty
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Table of contents

  1. Overvalued US dollar under increasing downward pressure 

    Overvalued US dollar under increasing downward pressure 

    The announcement of customs tariffs by the United States, to which the countries targeted have responded by announcing retaliatory measures, is already leading to a deterioration in business sentiment in the United States, driving up inflation expectations significantly, and driving down US consumer sentiment, coming when there have been massive layoffs at federal agencies and a clampdown on immigration. 

    Even if the United States were to suspend tariffs imposed on its main trading partners, the constant disruption of the US economy at the hands of the Trump administration has created such economic uncertainties that the dollar will continue to correct. The latest ISM manufacturing index showed a fall in order books, a fall in the employment component and a rise in the price component. 

    In sum, the risk of a slowdown in US economic growth hangs menacingly, the nowcast produced by the Atlanta Fed already pointing to a significant slowdown of the US economy in Q1-25.  

     

    overvalued dollar faces mounting pressure amid us growth fears and policy uncertainty grafika numer 1overvalued dollar faces mounting pressure amid us growth fears and policy uncertainty grafika numer 1

    Given the risk of a slowdown in the country’s growth, US long rates have fallen sharply, dragging down the US dollar. In this respect, the market is now pricing in three 25bp rate cuts by the end of 2025 compared with just one 25bp cut midway through February.  

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    In this environment, the 2-year interest rate differential between the United States and the Eurozone has narrowed significantly in favour of the EUR/USD, with this suggesting that the EUR/USD still has upside potential towards 1.10 in the short term (see charts), bearing in mind that the market is still short on the euro and that not all the news seems to have been priced in yet, particularly the negative news flow expected out of the United States, which could weigh more heavily on the US dollar.   

     


    Natixis Wealth Management

    Natixis Wealth Management

    Natixis Wealth Management offers customized wealth management and financial solutions to support business leaders, executives and owners of family capital


    Topics

    ism manufacturing indexinflation expectationsmarket positioningUS growth slowdowneuro strengthUS long yieldsUS rate cuts

    Trump tariffs

    USD overvaluation

    nominal effective exchange rate

    US stagflation risk

    trade retaliation

    US consumer sentiment

    Atlanta Fed nowcast

    EUR/USD upside

    2-year rate differential

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