Dollar’s “stronger for longer” rally may run out of road

The US dollar’s record run of 10 consecutive weekly gains has brought it to its strongest level since last December, and prompted renewed talk of FX intervention in Asia. We think that market participants have now gone too far in discounting the Fed’s “higher for longer” mantra, and that yield differentials, the main driver of the greenback’s rally, are likely to shift against it over coming months. If we are right that the US economy will slow and risk sentiment deteriorate, the greenback may still remain on the front foot in the near term on the back of safe-haven flows. But we think that the dollar will eventually fall back next year as the FOMC shifts towards easing policy faster than money markets now discount and the global economy starts to recover.