Dollar consolidation for now; yen rally likely to continue

The US dollar has finally hit a speedbump this week, with the DXY index registering its first weekly drop since late September. Given the continued resilience of the US economy – we expect next week’s US ISM surveys and non-farm payrolls to have rebounded in line with other recent US data – and a worsening outlook elsewhere, we don’t think this is the start of a deeper setback for the dollar. But given that optimism around the US economic outlook has already risen significantly in recent weeks, while pessimism around many other major economies has deepened, the bar for a further shift in expected interest rates in favour of the US in the near term is quite high. As such, a period of consolidation into year-end looks to us like the most likely scenario, although the risks remain skewed in favour of the dollar and we forecast a renewed rally over the course of 2025.