Dollar softens on inflation relief

The US dollar has eased back in the wake of somewhat better news on US inflation this week, which has seen US interest rate expectations fall back a bit further. Between this week’s inflation news, the recent softening of activity figures (including this week’s retail sales and housing data), and the FOMC’s relatively cautious stance, the greenback has now given back most of its gains since the shock of the March CPI data. (See Chart 1.) While we think some further moderation in US rate expectations and continued robust risk sentiment will hamper the dollar in the near term, our view is that rate expectations in Europe will fall more rapidly as the ECB and the BoE join the SNB and Riksbank in cutting rates well. In that context, we expect Asian currencies, in particular the much-maligned Japanese yen, to fare best.