Dollar softens on Powell & payrolls; MoF goes on the offensive

An eventful week in financial markets is ending with the dollar down, but mounting a comeback in the wake of today’s worryingly weak US non-manufacturing ISM survey. Between the earlier softer-than-expected US non-farm payrolls, the cautious message from Chair Powell earlier in the week, and Japanese officials finally stepping in to support the yen, there certainly has been no shortage of dollar-negative news. With the impetus towards higher US interest rate expectations that has driven the greenback’s rebound this year now stalling – and potentially going into reverse – there may be space for a new narrative to take hold across markets. The two obvious candidates are the “Goldilocks” scenario (in which the dollar probably weakens) and renewed fears of a “hard landing” (in which safe-haven demand may see the dollar strengthen). While we don’t forecast a US recession, we are less optimistic about the growth outlook than analysts’ consensus and what appears to be discounted in markets. As such, we continue to think the dollar is in for a rangebound year – pulled between hopes of Fed easing delivering a soft landing and fears of a more marked slowdown.