Fed surprise points to further dollar strength

The FOMC’s optimistic assessment of the outlook and the significant shift up in its “dot plot” projections has sent the US dollar soaring over the past couple of days. We have brought forward our own forecast for the first Fed hike, and our conviction in our forecast for a stronger dollar across the board this year has strengthened.
Jonas Goltermann Senior Markets Economist
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FX Markets Weekly Wrap

Fed guidance could revive the rally in the US dollar

The trade-weighted US dollar seems set to end the week a bit higher, reversing some of its recent decline. But the dollar strength has mostly been against G10 currencies; despite the fall in US equities this week, the “riskier” emerging market (EM) currencies have generally risen. We doubt this pattern will last, as we expect tighter financial conditions from rising US Treasury yields to put renewed pressure on most EM currencies. Indeed, we expect the Fed to signal a rate hike in March and an accelerated pace of quantitative tightening when it announces policy next Wednesday, which could prove the next catalyst for a stronger greenback.

21 January 2022

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We expect the dollar bull market to continue

Although the dollar’s rally has stalled over the past six weeks or so, and may tread water for a while longer, we think that it will ultimately appreciate a bit further this year and next. The key driver of the greenback’s rise since the middle of last year has been the Fed’s increasingly hawkish stance in response to a robust economic recovery and surging inflation pressures in the US. We expect that the Fed will deliver at least as many rate hikes as now discounted in money markets, and a significantly more aggressive pace of “quantitative tightening” than in the previous tightening cycle. In contrast, we think many other central banks will fall short of the pace and/or extent of monetary tightening that investors now appear to expect. In other words, we anticipate that rate differentials will continue to shift in favour of the greenback. We also think that the Fed’s apparent desire to tighten financial conditions in the US (which, if successful, would almost certainly affect global conditions) will continue to keep riskier currencies, especially in emerging markets, under pressure.

20 January 2022

FX Markets Weekly Wrap

We do not expect the recent dollar weakness to last

Despite several events in the US this week which would usually point to a stronger dollar – the highest US inflation print since the early 1980s, hawkish comments from both Chair Powell and Vice Chair Brainard, and a sharp rise in short-dated government bond yields relative to those in most other countries – the greenback fell this week. We think there are several possible explanations, including rising commodity prices, rotation out of the US tech sector, stretched long dollar positioning, and the fact that US money markets have already priced in a fairly aggressive rate path.

14 January 2022

More from Jonas Goltermann

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Taking stock of the carry trade after the FOMC’s surprise

While the shift towards rate hikes in several key emerging markets has provided a boost to their currencies, we doubt that the carry trade will fare as well in the second half of the year.

6 July 2021

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This may be as good as it gets for the Aussie and Kiwi

Although the RBA’s hawkish message today and further strong data out of New Zealand sent the Aussie and Kiwi higher, we are becoming less confident in our existing, bullish forecasts for both currencies. In our view, much of the good news on strong domestic recoveries and monetary policy normalisation in Australia and New Zealand is now discounted, but the downside risks from the economic slowdown in China and its impact on commodity prices are underappreciated.

6 July 2021

FX Markets Weekly Wrap

The US dollar rally may have further to run

The US dollar is ending the week stronger against most currencies, although it has fallen back a little this afternoon despite the stronger-than-expected non-farm payrolls report. While that reaction is perhaps a bit puzzling, the bigger picture is that the greenback has extended its post-FOMC rally against the other major currencies this week. We expect it to make further headway, provided that US data continue to come in strong.

2 July 2021
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