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Wait-and-see FOMC gives the dollar some respite

The dollar has edged higher against most major currencies over the week as a whole, supported by the FOMC’s pushback against expectations of policy easing in the near term. The turmoil in some Asian currency markets at the end of last week also appears to have stabilised, at least for now. Hopes of further trade war de-escalation have grown in the wake of the US-UK deal announced Thursday and ahead of formal negotiations between the US and China over the weekend. At this point it is unclear what a de-escalation package might look like, but press reports suggest a major reduction in headline US tariff rates. That would probably help the greenback in aggregate, given that the imposition of tariffs is what set off its sharp fall in April. At the same time, de-escalation would also reduce the chance of a big depreciation of the renminbi. And if the Trump administration’s (admittedly nebulous) ideas for a currency realignment (i.e. further dollar depreciation through official intervention) gets a mention in any announcement, a deal could prove a double-edged sword for the dollar.

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