Trade war redux & regional bank wobbles hit the dollar

The dollar has fallen back a bit this week amid renewed US-China trade tensions and, over the past day or two, jitters around US regional banks. Risk sentiment has taken a turn for the worse and interest rate expectations have dropped sharply as a result. With US rate expectations dropping further than most other major economies, the greenback has been on the backfoot. Our base case remains that the money market is discounting too many FOMC cuts and that the dollar will rebound over the coming months as the US economy powers on. But both the US-China situation and concerns around credit losses among US banks (and in the private credit market) are potential spoilers that could undermine the dollar’s prospects. Even if a pick-up in safe-haven demand might help the greenback against most currencies, the experience from earlier this year (and the mini-banking crisis in 2023) suggests that the dollar would weaken against the euro, the yen, and similar currencies if either trade or banking concerns intensified.

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