MUFG Research discusses the USD outlook in light of its sharp decline across the board.
"The dollar depreciation in May was telling – in particular, the drop in the final week of the month was the largest weekly decline for the dollar (on DXY basis) since Jan 2018 when we were in the final leg of the dollar sell-off vs EUR from around 1.0600 to close to 1.2500. Back then (better EZ growth) like now (Recovery Fund) there were EUR factors but the dollar has sold off more broadly as well and the continued improvement in financial market conditions opens up the dollar to being exposed to the aggressive monetary stance implemented by the Fed to alleviate dollar illiquidity risks," MUFG notes.
"The technical and fundamental backdrop has certainly worsened for the dollar but we are reluctant at this stage to make changes to our dollar depreciation forecasts which are starting to look cautious. The prospects of a risk correction are high which would prompt some reversal of this USD weakness. We are reluctant to materially adjust lower our USD levels vs EUR at this stage given the uncertain outlook and high level chance of a risk correction. Still, the fundamental backdrop for the dollar is deteriorating," MUFG adds.