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The US dollar will rebound in the second half of 2017, says JPMorgan

  • The U.S. dollar will receive support from a pick up in inflation and markets pricing in more interest rate hikes, according to JPMorgan Asset Management
  • JPMorgan favors European and Japanese equities over those in the U.S., where valuations are high

The current weakness in the U.S. dollar may be short lived, as a pick-up in inflation and expected rate hikes by the Federal Reserve will support the greenback in the coming months, JPMorgan Asset Management said Wednesday.

"We're thinking that the dollar will actually rebound in the second half, and this is mainly as the markets re-price in interest rates hike. We're of the view that inflation will actually be picking up in the U.S. and currently, markets have only priced in one rate hike now till end-2018," Jasslyn Yeo, global market strategist at JPMorgan Asset Management, told CNBC's "Street Signs."

"So, we think (markets) are going to do a bit of re-pricing and that will support a bit of a rebound in the dollar," she added.

The U.S. dollar tumbled to a 10-month low on Tuesday after the Republican health-care bill aimed at replacing Obamacare failed to get enough backing to proceed to a debate.

Some market observers have said that a weaker dollar can help to boost earnings of S&P 500 companies and eventually justify their high valuations. But Yeo said equity markets outside the U.S., such as Europe and Japan, have more upside potential.

US Dollar
Dado Ruvic | Reuters

Yeo noted that margins in Europe are starting to improve and that could translate into stronger earnings growth, while Japan is likely to benefit from a weaker yen versus the U.S. dollar.

"We still like certain spots in the U.S. market. Currently we still favor U.S. banks, which we like in terms of rate hike expectations, bond yields moving higher as well as the promise for financial deregulation in the banking system," she said.

"Purely from a valuation play we think that U.S. valuations are more challenging at the moment and investors should be looking to diversify out of the U.S. to other various markets."

— CNBC's Leslie Shaffer contributed to this story.