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We still think the backdrop is favourable for the US dollar

Although it has fallen back a little recently, we continue to think the greenback will appreciate further against most currencies as global economic growth disappoints. Asia Drop-In (30th June, 09:00 BST/16:00 SGT): Are Asia’s central banks behind the curve? Can the Bank of Japan and People’s Bank of China continue to go against the grain? Find out in our special session on what global monetary tightening looks like in Asia. Register now.  
Jonathan Petersen Markets Economist
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More from FX Markets

FX Markets Weekly Wrap

Dollar rallies as hope for a Fed pivot proves short-lived

The huge upside surprise in US payrolls data pushed the greenback higher against most major currencies today in an otherwise quiet week for FX markets. The continued strength of the labour market in the US adds to our conviction that the Fed remains some way off from taking its foot off the brakes, a message echoed by several Fed officials earlier in the week. By contrast, many other central banks face more difficult trade-offs: the latest labour market data from New Zealand and Canada showed falls in employment; the BoE and RBA both hiked by 50bp but revised their forecasts to reflect higher inflation and lower growth; and some emerging market central banks appear to be at or near the end of their tightening cycles. Next week’s US CPI data, which we expect will show continued strong core price pressures even if headline inflation slows, could put another nail in the coffin of the ‘pivot’ narrative. Even in the absence of further divergence in monetary policy, we expect slowing global activity and worsening risk sentiment to, underpin further strength in the greenback over the rest of the year.

5 August 2022

FX Markets Outlook

We think the dollar rally still has further to run

We think the dollar will appreciate further through at least the end of the year as the global economy continues to falter and “safe-haven” demand remains strong. Although we see limited scope for a further widening of expected interest rate differentials in favour of the greenback, we expect an environment in which the Fed and other major central banks continue to tighten monetary policy, even as economic growth slows, to support further dollar strength. We expect risky assets to remain under pressure for some time yet, and we believe that long-term yields have already peaked for this cycle. And previous peaks in the 10-year US Treasury yields have, more often than not, coincided with further dollar appreciation. We think a similar story will play out this time around as safe-haven demand makes the dollar, alongside the yen and the Swiss franc, the best performing currencies over the rest of this year and, probably, some way into 2023.

4 August 2022

FX Markets Weekly Wrap

Dollar struggles on market’s hope of a Powell pivot

The dollar looks set to lose further ground this week after the FOMC’s 75bp hike was, somewhat strangely, interpreted as the start of a dovish pivot and US Q2 GDP disappointed. However, the greenback has rebounded a bit today after income and spending data proved more robust and indicated continued strong price pressures. Our sense is that the risk-on response to the FOMC is largely down to a combination of wishful thinking and stretched positioning. In our view, there was little in Chair Powell’s remarks to suggest policymakers will abandon aggressive rate hikes while inflation remains so far above target. Indeed, he emphasised that policymakers anticipate that bringing inflation back to target will involve ”a period of below-trend growth and some softening of labour market conditions” – an unusual admission from a central bank governor. If we are right that markets have misread the Fed’s intention, the dollar will probably resume its rally before too long.

29 July 2022

More from Jonathan Petersen

Capital Daily

The case for a weaker renminbi remains intact

Although we now think policy rates in China will not be lowered further, we still expect the renminbi to weaken to 7.0/US$ this year. Markets Drop-In (22nd June, 10:00 ET/15:00 BST): Join our Markets team for this special briefing on the outlook for equities, bonds and FX and a discussion about revisions to our forecasts. Register now

20 June 2022

FX Markets Weekly Wrap

Souring risk sentiment reignites the dollar rally

The US dollar rose against all major currencies this week, reversing some of its fall over the past month or so. Much of this strength came late in the week as equity markets came under renewed pressure in the aftermath of the ECB’s hawkish message at its policy meeting yesterday. In particular, the lack of details on a “spread-fighting tool” pushed periphery spreads higher. And today, the higher-than-expected US CPI data added to evidence that the Fed will almost certainly raise rates by 50bp next week and will need to maintain its hawkish policy stance to bring inflation down. BoE Preview Drop-In (14th June, 10:00 ET/15:00 BST): Just ahead of the June MPC decision, we’ll explain in this 20-minute briefing why we’re even more convinced that UK rates will peak at an above-consensus 3% next year. Register now.

10 June 2022

FX Markets Update

Fed’s “QT” supports our case for a stronger US dollar

While we doubt it will be the main driver of the US dollar, the ongoing reduction in the size of the Fed’s balance sheet (i.e., “quantitative tightening”, or “QT”) adds to our conviction that the greenback will continue to appreciate over the rest of the year.

9 June 2022
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