Citigroup turns bearish on US dollar amid Fed policy shift

Citigroup strategists turned bearish on the US dollar in the near term as markets prepare for a less hawkish Federal Reserve, the November midterm elections and increased Treasury debt buybacks.

The bank lowered its three month forecast for the US Dollar Index to 98.34 from 102.12, according to a Thursday research note led by strategist Daniel Tobon.

The shift follows the Treasury’s decision to double the size of buybacks of 10 to 30 year securities through November, a move Citi said adds another bearish factor for the dollar.

The strategists said larger buybacks could pressure the currency by pushing US yields lower and raising concerns around financial repression.

The dollar index traded near 98.9 Thursday after falling to its lowest level since May a day earlier.

Citi had maintained a more neutral stance on the dollar in recent months but said risks are likely to increase heading into the final months of the year.

Traders have also reduced expectations for another Fed rate hike, reversing part of the support that had previously strengthened the dollar.

The strategists said investors may also avoid large long dollar positions ahead of the November midterm elections because of heightened political uncertainty and the possibility of election related disputes.

Citi left its longer term dollar outlook unchanged, citing stronger expected US growth compared with other Group of 10 economies.

The bank identified the US Iran conflict and continued AI related capital spending as risks to its near term bearish view. Higher oil prices or inflation driven by large investment spending could increase the likelihood of renewed Fed tightening.

Citi also raised its three month EUR/USD forecast to 1.1750, citing expectations for a quarter point European Central Bank rate increase in September alongside reduced expectations for another Fed hike.

EUR/USD traded near 1.17 on Thursday around midday in New York.