Despite the Sell-Off Following BofA’s Rate News, No Downtrend for the Dollar

On Monday, the US dollar experienced a significant sell-off, losing more than 1% in value following the announcement of the new US administration's "universal tariff" plan. Investors are questioning whether this marks the beginning of a trend similar to that of 2017, when the dollar consistently declined throughout President Trump's first year in office. However, Bank of America (BofA) analysts believe there is insufficient evidence to declare that a downtrend for the US dollar has begun.

The market's abrupt reaction caused the DXY index, which measures the dollar's value against other major currencies, to drop to the 108 level. This level is considered a short-term equilibrium point for the dollar, especially following the hawkish stance taken by the Federal Open Market Committee (FOMC) in December 2024. The FOMC's decision was characterized as "clearly hawkish monetary easing" in a BofA report dated December 18, 2024.

Looking ahead, the US dollar may gain strength following the employment report for December, which is set to be released this Friday. BofA's "Labor Market Monitor" report, dated January 6, 2025, suggests that a robust labor market could lead to a reassessment of expectations regarding potential interest rate cuts by the Federal Reserve in 2025.

Investors and market participants are now focused on the upcoming employment data for further direction. The expectation is that a strong employment report could reverse the newly emerging bearish market sentiment and support the dollar's value in the short term.

In summary, while the recent sell-off has raised questions about the dollar's trajectory, BofA argues that a single day's movement is not indicative of a long-term trend.