Skip to main content

Diverging inflation stories prop up dollar, for now

The theme of the week has been one of diverging inflation stories which have helped boost the US dollar. These divergences came not just between economies (hot inflation data in the US and cold in the UK, for example) but also within economies, with mixed messages from core US CPI and PCE inflation data. But the reaction to US inflation data looks misguided to us – we think the Fed is focused on PCE inflation, which looks on track to hit 2% by May. As investors come around to our view and price Fed rate cuts back in, we think the dollar will hand back some of its recent strength. That said, we don’t expect the Fed to cut rates until May; so, a turnaround in investors' rate expectations might not be imminent. And, in the interim, we expect strong relative demand for US equities to persist and support flows into the US dollar. So, we wouldn’t be surprised if the greenback continued to grind higher for a bit longer.

Become a client to read more

This is premium content that requires an active Capital Economics subscription to view.

Already have an account?

You may already have access to this premium content as part of a paid subscription.

Sign in to read the content in full or get details of how you can access it

Register for free

Sign up for a free account to gain:

  • Unlock additional content
  • Register for Capital Economics events
  • Receive email updates and economist-curated newsletters
  • Request a free trial of our services

Get access