Dollar could be about to hit an inflection point, Wells Fargo says

The U.S. dollar index has fallen by around 9 percent since the start of the year but that could be about to change, according to strategists at Wells Fargo.

Disappointing economic data, political uncertainty and positive developments abroad have sent the U.S. dollar lower despite two rate hikes by the Federal Reserve. "We review the recent selling as overdone and expect a stronger U.S. dollar from current levels by year-end 2017, a reversal of the current trend," Sameer Samana, global quantitative strategist at Wells Fargo.

The update in the forecast was due to three reasons: differences among global interest rates, economic growth and inflation; further political risks in the euro area; and investors becoming too negative on the greenback.

While in the U.S. the Fed is raising rates and shrinking its balance sheet, in Europe, the central bank is unlikely to deviate from negative rates soon. At the same time growth and inflation in the U.S. have recovered at a faster pace than in Europe. "While that lead has narrowed as growth and inflation in the euro area have rebounded, it still favors the U.S.," the bank said.

However, it sees the upcoming Italian elections as a large political and economic risk to the euro area.

Lastly, analysts at Wells Fargo said that investors have become the most negative on the U.S. dollar since 2014, "which sets the stage for positive surprises in the U.S. dollar's favor in the second half (of the year)."

Source: Bloomberg

Junior Trader Stefan Panteleev

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