Key Points

According to a report by Union Bank of India, the dollar's decline is now being supported by a more fundamental shift as global capital is moving away from US assets.

The report stated, "The dollar's weakness is no longer being driven solely by shifting rate expectations; it is now being reinforced by a decisive reallocation of global capital".

It also suggested that unless the US Federal Reserve re-establishes a clear lead in policy or US economic growth picks up speed, the report highlighted that this preference for non-US fixed income assets could continue to weigh on the dollar index (DXY) in the near term.

The report also noted that a number of Federal Reserve officials have recently made dovish comments, meaning they are leaning towards keeping interest rates steady or even lowering them. This has added to the pressure on the dollar, encouraging investors to increase short positions, bets that the dollar will continue to fall.

Earlier in the year, the dollar index had started slipping in late February, mainly due to weaker US economic data and a gradual reassessment of the Fed's interest rate path.

However, at that time, the dollar was still seeing strong support from global capital flows. For example, four-week average inflows into US equity funds were around USD 6-7 billion in late February and rose to a peak of USD 9 billion by mid-April. US bond funds also saw consistent inflows of USD 7-9 billion during this period.

As per report, this showed that the initial weakness in the dollar was more linked to interest rate expectations rather than any major shift in investor confidence. But that is changing now. With geopolitical tensions largely priced in, the future of the dollar is expected to be shaped more by domestic US factors.

The report outlined that the dollar's direction now appears to be guided less by global interest rate trends and more by shifting capital flows and local US events.

- ANI