Citigroup Strategists Forecast Bearish Outlook for US Dollar Amid Fed Policy Changes

Citigroup's currency strategists have expressed a negative outlook on the US dollar, influenced by expectations of a less aggressive Federal Reserve, the approaching midterm elections, and the US Treasury's planned increase in debt buybacks. The bank has lowered its three-month forecast for the US Dollar Index to 98.34 from 102.12, as noted in a recent research note led by strategist Daniel Tobon.

The US Treasury's decision to double the size of buybacks of 10 to 30-year securities is seen as a contributing factor to the dollar's decline, adding downward pressure by pushing US yields lower. The dollar index traded near 98.9 after falling to its lowest level since May. This shift in sentiment follows a period where Citigroup maintained a more neutral stance on the dollar.

Traders are also reducing expectations for another Fed rate hike, which previously provided support to the dollar. The strategists noted that political uncertainty surrounding the November midterm elections could lead investors to avoid large long dollar positions. However, Citigroup's longer-term outlook on the dollar remains unchanged, citing stronger expected US growth compared to other Group of 10 economies.

In addition, the bank raised its three-month EUR/USD forecast to 1.1750, anticipating a quarter-point rate increase from the European Central Bank. This adjustment reflects the reduced expectations for another Fed hike, with EUR/USD trading near 1.17 on Thursday.