US dollar bull market might just be getting started

The dollar has risen to its strongest level in more than a year and, though it is not our central forecast, we think the risk of a more sustained dollar bull market is increasing.
Jonas Goltermann Senior Markets Economist
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FX Markets Weekly Wrap

Fed guidance could revive the rally in the US dollar

The trade-weighted US dollar seems set to end the week a bit higher, reversing some of its recent decline. But the dollar strength has mostly been against G10 currencies; despite the fall in US equities this week, the “riskier” emerging market (EM) currencies have generally risen. We doubt this pattern will last, as we expect tighter financial conditions from rising US Treasury yields to put renewed pressure on most EM currencies. Indeed, we expect the Fed to signal a rate hike in March and an accelerated pace of quantitative tightening when it announces policy next Wednesday, which could prove the next catalyst for a stronger greenback.

21 January 2022

FX Markets Outlook

We expect the dollar bull market to continue

Although the dollar’s rally has stalled over the past six weeks or so, and may tread water for a while longer, we think that it will ultimately appreciate a bit further this year and next. The key driver of the greenback’s rise since the middle of last year has been the Fed’s increasingly hawkish stance in response to a robust economic recovery and surging inflation pressures in the US. We expect that the Fed will deliver at least as many rate hikes as now discounted in money markets, and a significantly more aggressive pace of “quantitative tightening” than in the previous tightening cycle. In contrast, we think many other central banks will fall short of the pace and/or extent of monetary tightening that investors now appear to expect. In other words, we anticipate that rate differentials will continue to shift in favour of the greenback. We also think that the Fed’s apparent desire to tighten financial conditions in the US (which, if successful, would almost certainly affect global conditions) will continue to keep riskier currencies, especially in emerging markets, under pressure.

20 January 2022

FX Markets Weekly Wrap

We do not expect the recent dollar weakness to last

Despite several events in the US this week which would usually point to a stronger dollar – the highest US inflation print since the early 1980s, hawkish comments from both Chair Powell and Vice Chair Brainard, and a sharp rise in short-dated government bond yields relative to those in most other countries – the greenback fell this week. We think there are several possible explanations, including rising commodity prices, rotation out of the US tech sector, stretched long dollar positioning, and the fact that US money markets have already priced in a fairly aggressive rate path.

14 January 2022

More from Jonas Goltermann

Capital Daily

How far can the dollar rise?

After its most recent surge on the back of last week’s strong payrolls report, this week’s exceptionally high inflation reading, and hawkish comments from some FOMC members, the DXY index has now risen by ~5% since the start of the year. We think there are three key points to make.

12 November 2021

FX Markets Update

Bond market volatility may be taste of things to come in FX

We think that the recent pick-up in bond market volatility will persist and that volatility in currency markets will also rise further as uncertainty around the economic outlook and monetary policy remains high.

12 November 2021

FX Markets Weekly Wrap

Dollar rallies & sterling drops on confusing BoE messaging

After another week of wild swings in short-term interest rate markets, the US dollar is ending the week stronger against most major currencies. On a trade-weighted basis it is now near its strongest level since last November. Neither the Fed meeting nor the stronger-than expected non-farm payrolls report proved decisive – indeed, the Fed’s policy statement was, if anything, on the dovish side. But whereas Chair Powell was somewhat ambiguous in his remarks, policymakers elsewhere pushed back more forcefully against the policy rate paths discounted in money markets. This led to broad-based drop back in near-term rate expectations, but also a swing in rate differentials in favour of the dollar against a few currencies, as US rates fell by less than those in some other economies.

5 November 2021
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