Dollar down as more cracks emerge in US economy

More evidence of softening in the US economy from data releases – notably, the ISM survey data and June’s employment report – weighed on US Treasury yields and left the greenback lower against most major currencies on the week. Otherwise, election-related news across developed markets (including growing uncertainty about the US election) appears to have made little impact on FX markets. Our view remains that yield gaps are likely to be the key driver of the dollar and keep it rangebound against most currencies. Next week’s inflation data out of the US is likely to reinforce that rate hikes from the Fed are off the table and no longer an upside risk for the dollar. Instead, the key emerging risk for the dollar now seems to be a weakening economy pushing Treasury yields even lower than we expect, even if it might benefit from a short-lived “safe-haven” bid if “risky” assets falter.