Dollar treads water amid growing turbulence

Amid the surge in Treasury yields and the fall in global equities, the US dollar seems set (somewhat surprisingly) to end the week broadly unchanged. In our view, the key reason the dollar has failed to rally on the back of what looks in many ways like a dollar-positive environment is that term premia are now the primary driver of rising global bond yields (and arguably, falling equity prices). Indeed, comments from Chair Powell and other Fed speakers this week suggests another rate hike is less likely, which has pushed near-term interest rate expectations in the US a bit lower over the past couple of days. Our baseline forecast remains for the dollar to stay strong in the short term and make only limited gains from here. But upside risks to this view have grown as factors behind the current backdrop – e.g., surging yields, rising volatility, and heightened geopolitical uncertainty – intensify.