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Greenback Strength Driven More by China Than Fed – BofA

Greenback Strength Driven More by China Than Fed – BofA

(31 August 2023 – United States) The odds of the US Dollar appreciating further beyond its 3.5 percent rise in the last month depend more Chinese economic growth than Federal Reserve interest rate settings according to Bank of America (BofA).

Optimism towards China’s economic recovery in the wake of sweeping pandemic restrictions peaked in February. Since then, sentiment on “reflation” in China (economic activity recovery via government stimulus) has been the dominant driver of USD performance, even more so than Fed policy the BofA macro strategists reported.

“The greenback has had a relatively tough 2023, trading flat following two years of increases of more than five percent. Owing to its safe haven status, the dollar has historically been negatively correlated to the outlook for growth in China, a key determinant of global risk sentiment and trade. But that outlook has tumbled in recent months as a growing real estate crisis imperils the Chinese rebound from the pandemic” commented BofA FX Strategists Adarsh Sinha and Janice Xue.

"China reflation sentiment is close to 2022 lows and we show this has been the dominant driver of USD since the February 2023 peak reopening optimism, even more so than Fed policy. We are bullish USD but a lot hinges on whether China rolls out meaningful, coordinated stimulus in coming weeks” the BofA FX Strategists added.

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