“Heads I lose, tails you win” for the dollar

The dollar is ending the week on the backfoot, despite the ongoing normalisation and returning risk appetite across financial markets, as well as a generally decent set of US economic data. Somewhat surprisingly, the greenback remains well below its pre-2nd April level, even though US equity and Treasury markets have recouped most of their early April losses. In part, that is probably on account of reports of incipient trade negotiations between the US and China, which have given Asian currencies a sizeable boost today. Even so, we continue to see scope for the dollar to stage a partial rebound over the coming weeks as the perceptions around the US economy continue to improve and interest rate differentials shift back in its favour. Two key underpinnings for that view are a relatively hawkish FOMC stance – we doubt policymakers will signal imminent policy easing at their meeting next week – and progress towards a deal in Congress that avoids a tightening of fiscal policy and a debt ceiling stand-off in Q3.