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Analysts at Commonwealth Bank of Australia have confirmed they are confident the U.S. Dollar will begin to depreciate over 2019.

The U.S. Dollar finds itself in a multi-year rally that mirrors the ongoing growth in the U.S. economy since the recession inspired by the financial crisis of 2008 ended. The growth has prompted the U.S. Federal Reserve to raise interest rates, in turn creating an incentive for global investors to invest in Dollar-based assets.

The debate as to whether the multi-year strength can continue is one of the more prominent ones in the foreign exchange analyst community.

The cycle of appreciation in both the U.S. economy and its currency are now mature, and CBA strategist Richard Grace says a more cautious Federal Reserve will ease back on raising interest rates which should in turn weigh on the Dollar in 2019.

"The slowing in the interest rate sensitive parts of the U.S. economy combined with Fed Chair Jay Powell’s comments that he is “listening carefully” to financial markets and remains “patient” have radically swung 2019 market pricing for the Fed Funds rate towards rate cuts," says Grace.

Image courtesy of CBA.

CBA anticipate the U.S. Dollar to modestly depreciate over 2019 in response to the slowing of the U.S. economy and the peak (or pause) in the Fed’s tightening cycle.

However, analysts at CBA's investment bank don’t envisage "a large USD depreciation this year, nor a major near‑term depreciation."

So while the rally is over, the prospect of a big move lower is yet to materialise.

In short, interest rates in the U.S. remain higher than in other developed economies, which should allow investors to continue seeking out U.S. yield.

Timing the U.S. Dollar pullback is important, and the message from CBA is to exercise patience.

"The major depreciation in the USD will take place mid‑2019 as economic growth in the Eurozone (and global economy) modestly recovers, and the ECB subsequently edges closer to their tightening cycle. The risk is a delay in the ECB’s tightening cycle and a delay in the depreciation of the USD," says Grace.

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