Dollar treads water amid global tightening cycle

Another solid gain in US payrolls did little to boost the dollar today, which seems set to end the week little changed against most major currencies. During the course of this week, central banks in Chile, Czechia, and Colombia continued to tighten policy, while the latest inflation data pushed up investors’ expectations – and, indeed, our own – for the paths of policy rates in the euro-zone and Switzerland. The lack of substantial monetary policy divergence over the next few years may limit the extent to which the dollar will strengthen against other currencies in the short term. But we still think the dollar could edge higher in this broad-based tightening cycle once emphasis shifts from how fast to how far central banks will tighten, given our view that the US is better-placed than most major economies to tighten above its “neutral rate” in this cycle.