Dollar is down but not (yet) out

The dollar’s February rebound has been cut short by turmoil in the US regional banking sector, but we continue to think the greenback will make one final push higher as advanced economies fall into recession and risk sentiment deteriorates. Although the Fed may now be done with rate hikes, in most previous tightening cycles the dollar continued to appreciate even after short-tern US interest rates peaked. Admittedly, the US-centric nature of the recent bout of financial system instability – which raises the prospect that the Fed eases policy much further and faster than other central banks – poses a risk to that view. But our judgement is that “safe-haven” demand in a global downturn is likely to prove the dominant factor in currency markets over the coming months, driving the dollar (and the yen) higher in the near term.