Citi expects the US dollar's recent weakness to persist despite upcoming remarks from Federal Reserve Chair Kevin Warsh at Jackson Hole, citing valuation and market positioning as key risks rather than a sudden policy shift
The US dollar has continued to weaken against major currencies in the lead-up to the annual Jackson Hole symposium, with market attention focused on whether Federal Reserve Chair Kevin Warsh's upcoming speech could alter the currency's direction. According to Citi, the likelihood of a sharp reversal in the dollar's fortunes remains low, as the bank sees valuation and positioning as the main risks, rather than the prospect of a hawkish policy surprise from the Federal Reserve.
At the July Federal Open Market Committee (FOMC) press conference, Warsh outlined several possible approaches for his Jackson Hole address, ranging from a traditional policy preview to a broader discussion of the "big questions" facing US monetary policymakers. Citi analysts suggest that Warsh's remarks are likely to fall somewhere in between, focusing on medium-term themes such as productivity and the impact of artificial intelligence, rather than signaling an imminent change in policy stance.
Limited Scope for a Hawkish Surprise
Citi's research identifies three scenarios that could prompt a more hawkish tone from Warsh: insufficient hawkish expectations already priced into the market, a need to contain longer-term yields, or clear evidence of renewed inflationary pressures. However, the bank argues that none of these conditions currently apply. With around 10 basis points of tightening already priced in for September, Citi believes financial conditions are sufficiently restrictive to satisfy policymakers. Additionally, the bank's rates strategists do not expect a rate hike-even in an extreme scenario-to reverse the recent rise in term premiums on US government bonds. Recent inflation data has also been softer, reducing the urgency for a hawkish shift.
In the context of broader currency trends, Citi has shifted its outlook on the dollar from neutral to bearish. The bank's real rates model for the euro-US dollar pair (EUR/USD) projects a move toward 1.18, assuming the Federal Reserve holds rates steady, the European Central Bank raises rates once more, and oil prices normalize. This forecast includes the possibility of an overshoot if market sentiment turns more negative on the dollar.
Valuation, Positioning, and Geopolitical Risks
Citi's strategists emphasize that the main risks to their bearish dollar view are not tied to Warsh's speech, but rather to market positioning, valuation, and geopolitical developments. The EUR/USD exchange rate is now considered increasingly overvalued, and with many leveraged investors already holding short dollar positions, some position adjustments could occur around the time of the Jackson Hole event. On the geopolitical front, Citi highlights the risk of renewed tensions between the US and Iran, but prefers to hedge this exposure through a four-month Norwegian krone-Swedish krona (NOK/SEK) call spread, rather than building it into their base case for the dollar.
One area where a hawkish surprise could emerge, according to Citi, would be if Warsh previews results from the Federal Reserve's internal task force on the balance sheet. However, the bank sees little incentive for such an announcement, especially if there is coordination with Treasury Secretary Bessent. Instead, any early insights from the task force are more likely to focus on artificial intelligence and productivity, which would tend to support a more dovish or disinflationary outlook.
Recent Dollar Moves and Market Context
In recent weeks, the US dollar index has declined as investors reassess the outlook for US interest rates and global growth. For example, the EUR/USD pair has strengthened from around 1.07 in early July to above 1.10 by mid-August, reflecting both softer US inflation data and shifting expectations for central bank policy. According to a recent analysis of global currency trends, some research firms have also highlighted a move away from the US dollar in favor of Asian and European currencies, citing factors such as weakening real yields and reduced foreign investment. This perspective is explored further in a related article on how changing investment flows are affecting the dollar's position in global markets: shifting investor preferences and the dollar's recent challenges.
Looking ahead, the market will closely watch Warsh's Jackson Hole remarks for any signals on the Federal Reserve's medium-term priorities, but most analysts expect the speech to reinforce existing themes rather than trigger a major policy shift. The balance of risks remains tilted toward further dollar weakness, unless unexpected developments in policy, positioning, or geopolitics intervene.
The Jackson Hole symposium is an annual gathering of central bankers, economists, and policymakers, hosted by the Federal Reserve Bank of Kansas City. While the event is closely watched for potential policy signals, its influence on currency markets often depends on the clarity and substance of central bank communications. In years when the Federal Reserve has used Jackson Hole to announce or hint at major policy changes, the US dollar has sometimes reacted sharply. However, when the focus shifts to longer-term themes such as productivity, technology, or structural economic changes, the immediate impact on exchange rates tends to be more muted, with market participants instead adjusting positions based on evolving expectations and risk assessments.
