As global markets grapple with rising geopolitical risks and shifting macroeconomic dynamics, currency regime shifts are becoming more central to asset allocation decisions, especially for long-horizon investors. While long-term structural challenges threaten to weigh on the U.S. dollar, BCA Research now recommends tactical long positions on the greenback, citing its oversold condition and favorable technical signals.
Despite maintaining a bearish long-term outlook on the dollar, BCA points to short- to mid-term dynamics that support a rebound. Their analysts highlight a potentially looming balance-of-payments crisis, a scenario widely acknowledged among macro strategists. However, for investors operating on a three-to-six month horizon, technical indicators outweigh the structural headwinds.
In tandem, BCA recommends short positions on the British pound, which appears overbought and vulnerable to a correction. The pound’s recent rally is seen as overextended, especially in light of stagnant progress on UK economic reforms and persistent current account deficits.
Meanwhile, recent moves by the Trump administration to curb immigration are beginning to echo through U.S. labor markets. Wells Fargo analysts note a net decline in foreign-born workers over the past four months, reversing the post-COVID rebound that helped address labor shortages in agriculture, construction, and services.
The 88% drop in border encounters and suspension of certain temporary parole programs has significantly restricted labor inflows. Although deportations remain near Biden-era levels, the administration’s stepped-up enforcement has sparked protests in major U.S. cities. Analysts caution that reduced labor supply may coincide with easing demand, predicting a modest rise in unemployment to 4.5% in the next year, up from May’s 4.2% reading.
Against this backdrop, currency and fixed-income markets are closely eyeing central bank signals. This week’s Federal Reserve meeting is unlikely to bring a rate change, but the spotlight is on the dot plot and whether it still implies two cuts in 2025 or just one. The dollar’s fate may hinge on that nuance, particularly amid a backdrop of rising oil prices and escalating conflict between Israel and Iran.
While initial fears of Middle East contagion lifted oil 4% in early trading Monday, prices later retraced to a 1% gain. Markets appear to be assuming Iran will avoid escalating to the point of threatening the Strait of Hormuz, which could draw the U.S. into direct conflict.
In Europe, central bank divergence continues to shape currency performance. The Swiss National Bank is expected to cut to zero or below while Riksbank may ease policy amid krona strength. The Bank of Japan and Bank of England are likely to hold steady.
With geopolitics and macro data in flux, the tactical window for a dollar rebound is now open even if long-term bearish fundamentals still loom.
