Citigroup's currency strategists have turned negative on the dollar for the near term. They had been holding a "more neutral" stance until now, so this marks a real shift in sentiment.
The bank lowered its three-month forecast for the US Dollar Index from 102.12 to 98.34. That is a meaningful move for a currency call, and it signals they expect the greenback to keep sliding in the months ahead.
So what changed? Three things, according to Citi: expectations of a less hawkish Federal Reserve, the upcoming midterm elections, and increased US Treasury debt buybacks. Together, they have convinced the bank's strategists that the dollar's short-term path points down.
The trigger is the US Treasury's plan to double its buybacks of long-term debt through November. When the Treasury buys back its own bonds, it pushes yields down.
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Lower yields make the dollar less attractive to global investors. Daniel Tobon and his team at Citi called the buybacks "another bearish element to the USD" that also raises concerns about "financial repression" - the idea that government policy is keeping interest rates artificially low. That is rarely good news for a currency.
In August, the 10- and 30-year Treasury bond auctions produced yields not seen in over two decades, a sign that investors are demanding more compensation for holding long-term US debt. That dynamic could keep pressuring the dollar in the months ahead.
Citi also raised its three-month EUR/USD forecast to 1.1750. They expect the European Central Bank to hike rates by a quarter-point in September, which would narrow the gap with the Fed's expected path.
If the European Central Bank moves while the Fed holds steady, the euro should gain ground against the dollar.
For most investors, a weaker dollar is a mixed bag. It makes US exports cheaper and can boost the value of international investments when converted back to dollars.
But it also means higher prices for imported goods. Citi's long-term view remains unchanged, with US growth still outpacing its G10 peers, but they see risks tilted toward a weaker dollar through November's midterms.
They also flag US-Iran tensions and AI-related spending as wildcards that could spur inflation and force the Fed to hike again. If you own international stocks or funds, currency moves like this matter more than you might think. A dollar that slides toward 1.17 against the euro could shift the value of your overseas returns in a big way.
The dollar index's slide is part of a broader trend that began in early summer. As expectations for a Fed rate hike were pared back, the greenback lost ground against most major currencies. The upcoming midterm elections in November add increased uncertainty around US politics, and the Treasury's aggressive buyback schedule is seen as a way to manage the government's maturity profile, but it also tightens the supply of long-term bonds. Investors are now weighing whether these moves will keep the dollar under pressure into the fourth quarter.
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