Recessions likely to drive the dollar higher

While “riskier” currencies have generally had the best of it over the past couple of months, the dollar has remained rangebound and, in aggregate, is broadly unchanged on the year. With the euro-zone already in recession, China’s post-lockdown rebound faltering, and the US economy showing signs of fatigue, the worsening economic outlook appears incongruous with the general fall in risk premia observed over recent months. Indeed, export growth in “bellwether” economies point to a rebound in the dollar. As such, we continue to think that the dollar (and the yen) will rally over the second half of the year as the long-anticipated recession finally takes hold and risk sentiment sours.