Dollar continues to march higher ahead of October payrolls

In another volatile week, the US dollar continued to appreciate against most other currencies, reaching its strongest level, in aggregate, since last November. In part, the greenback’s rally may have been driven by month- and quarter-end flows, and it has fallen back over the past couple of days. But the underlying drivers underpinning the recent dollar rally – the FOMC’s hawkish shift, and ongoing uncertainty around China’s economy and the strength of the global recovery – continue to point to a stronger dollar, in our view.
Jonas Goltermann Senior Markets Economist
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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.

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We expect the dollar bull market to continue

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We do not expect the recent dollar weakness to last

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14 January 2022

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What would an era of higher inflation mean for currencies?

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Hawkish Fed & China risks point to a stronger dollar

In a choppy week dominated by some surprising central bank announcements and the ongoing uncertainty around China’s property sector, the US dollar continued to make some headway, especially against emerging market currencies. The FOMC delivered another hawkish message, signalling that a taper announcement is imminent and shifting its “dot plot” policy rate projections higher again. Although the dollar has not soared in the way that it did following the June FOMC meeting, US bond yields have risen sharply. We continue to think that a renewed widening of bond yield gaps in favour of the US will drive the dollar higher before long.

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