Risk Management of the US Dollar – BoA Securities

Markets seem to have embraced the “soft landing” narrative following the Federal Reserve’s substantial interest rate cut. However, Bank of America Securities continues to recommend selling the US dollar, believing the central bank still has room to lower rates further.

In a report dated September 26, Bank of America noted that after the Fed’s 50 basis point cut, short-term rates—key drivers of foreign exchange movements—reflect anticipated easing on par with significant past downturns.

Risk assets are showing performance more aligned with a “soft landing” and a reflation scenario. Higher-beta currencies are outperforming lower-beta ones, equities and gold prices are rising, credit spreads are tightening, and the long end of the U.S. Treasury curve is experiencing bear steepening.

While the bank maintains that a soft landing is the most likely outcome, they also foresee a general depreciation of the USD. However, they caution that the risks associated with a hard landing appear to be underestimated, emphasizing the need to remain vigilant in these unpredictable times.

Significant rate shocks, whether upward or downward, typically benefit the dollar, but the nature of these movements is crucial.

According to their analysis, with the “soft landing” narrative already priced into the market, any negative news could lead to brief periods of risk-off sentiment and a temporary strengthening of the USD. Nevertheless, Bank of America believes the current environment is one of “sell-the-rally” for the dollar.