Continued dollar rally looks increasingly likely

The US dollar is set to end another week higher against nearly all major currencies. To a large extent, this latest rally appears to be driven by the rise in short-term government bond yields in the US relative to other major economies, notably the euro-zone. And today’s news about renewed lockdowns in parts of Europe has reinforced growing concerns about the pace of the global economic recovery. Given our view that global growth will continue to slow and inflationary pressures in the US will prove more sustained than widely anticipated, the backdrop remains favourable for the dollar to strengthen further. Indeed, the minutes of the FOMC’s last meeting (due Wednesday) could lend support to this view.
Jonathan Petersen Markets Economist
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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.

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The outlook for high-beta DM currencies in 2022

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We think that the yen remains vulnerable to rising US rates

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Investors’ expectations and the outlook for DM monetary policy

Although near-term inflationary pressures may prompt most developed market (DM) central banks to bring forward their plans to normalise policy a bit, we continue to think that most will raise rates more gradually than investors currently expect. That said, we still anticipate that long-term bond yields in some DMs will rise further, particularly where we think inflationary pressures will remain elevated over the next few years.

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