The US dollar has added to its post-CPI surge, leaving it stronger this week against all major currencies on the back of expectations for even tighter Fed policy and weaker appetite for risk. Although our central forecasts imply that yield gaps will not shift much further in favour of the dollar, a 100bp hike and/or upward revisions to the Fed’s latest projections at its meeting next could boost the greenback even higher. But given that the majority of thirteen major central banks announcing policy next week are expected to raise rates, bond yield gaps may not shift much. Even so, our downbeat view on global economic growth suggests to us that continued weakness in risk sentiment could push the dollar to new cyclical highs before long.
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