In the first half of this year, the US dollar has been strengthening along with strong economic performance, but with economic slowdown and impending interest rate cuts, the outlook for the US dollar faces more uncertainty.

Since the third quarter, the US dollar has been the weakest performing currency among the G10 currencies.

On August 22nd, Bank of America Merrill Lynch strategists Athanasios Vamvakidis, Paul Ciana, and others released a research report stating that the US dollar is currently in the middle of a "smile curve." Considering the prospects of a "soft landing" for the US economy and interest rate cuts by the Federal Reserve, they continue to be bearish on the US dollar for the second half of the year.

Continuing to be bearish on the US dollar, it is expected that the Federal Reserve will cut interest rates twice this year.

The report states that in the first half of the year, with strong economic growth and sticky inflation, expectations of a Federal Reserve interest rate cut were repeatedly delayed, which helped strengthen the US dollar. However, now, with the US economy slowing down, the market has almost fully priced in an impending Federal Reserve interest rate cut, leading to the continuous weakening of the US dollar.

At the beginning of this year, due to the unexpected "dovish" stance of the December FOMC meeting and strong expectations of interest rate cuts, the US dollar weakened. However, we believe that inflation still has stickiness and interest rates will remain high for a longer period of time. The easing cycle will be later and weaker than market expectations, so we were bullish on the US dollar in the first half of the year - and this has proven to be correct. In addition, the better-than-expected economic performance in the United States has also helped fuel the rise of the US dollar.

Then, with the US economy slowing down and interest rate cuts imminent, the US dollar has been weakening since the third quarter. It is expected that the US dollar will continue to weaken with a "soft landing" for the economy and Federal Reserve interest rate cuts.

The report points out that the US dollar has now moved from the right side of the "smile curve" to the middle.

The "smile curve" theory was proposed by former Morgan Stanley currency strategy analyst Stephen Jen. According to this theory, the US dollar will strengthen during periods of significant economic decline or strong growth in the United States, but weaken during periods of global widespread growth.

The middle stage of the "smile curve" means that the US economy is neither strong nor in recession, resulting in a weakening of the US dollar.

The report also adds that the answer to the question of whether the US dollar will continue to move left (strengthening due to global economic recession) is negative - with the improvement of economic data, recession concerns have diminished, boosting risk sentiment and thus bearish on the US dollar.

Bank of America also states that even if other central banks begin to cut interest rates, it will not add attractiveness to the US dollar, because the impact of the Federal Reserve's rate cuts will be more profound. If the unexpected regional economic growth in the United States is stronger, it will be even more bearish on the US dollar.

The report also predicts that the Federal Reserve will cut interest rates twice this year, and the market is currently pricing in too much expectation of four rate cuts by the Federal Reserve.