Dollar rally continues as Jackson Hole approaches

The US dollar has risen sharply this week, reaching its highest level of the year as continued fears about the spread of the “delta” variant and further evidence of growing risks in China (around its economic slowdown, the widening regulatory crackdown on major tech firms, and concerns about its opaque financial system) have weighed on risk appetite and increased demand for safe havens. While we continue to forecast a robust economic recovery, the near-term risks in financial markets appear skewed to the downside, which may well continue to support the greenback.
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

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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

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We think the US dollar is strong, but could rise further

The US dollar remains somewhat above its “fair” value on most of the metrics we track. But its overvaluation is not extreme by historical standards, nor is that of many other currencies, and we do not think that it will prevent the greenback from rising a bit further over the next 6-12 months.

20 August 2021

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COVID remains a key risk for the Kiwi

The RBNZ’s decision to delay raising interest rates highlights how the spread of COVID-19, and governments’ responses to it, has returned as a key driver in financial markets over the past couple of months. Nonetheless, unless the outbreak in New Zealand worsens significantly, we continue to expect the RBNZ to hike rates sooner and faster than most other G10 central banks, leading to higher bond yields and a resilient Kiwi.

18 August 2021

FX Markets Update

What would it take to generate a much stronger US dollar?

We think that the upside risks to our US dollar view have increased. On a trade-weighted basis, we forecast a ~4% rise from its current level by the end of 2022; this Update considers what factors might deliver a more significant (10%+) rally in the greenback over the next 6-18 months. China slowdown webinar: Join us on Thursday, 5th August for a special webinar assessing the impact of China’s economic slowdown on the global recovery. Neil Shearing will lead a discussion with economists from across our economics and markets services to assess whether investors should brace for fresh volatility with China poised for a structural deceleration. Register here for sessions at 0900 BST/1600 HKT or 1100 ET/1600 BST.

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