FX Weekly: Dollar rebound probably has a bit further to run

Financial markets have continued to stabilise and the dollar has finally rebounded a little over the past few days. More than anything, that appears to reflect relief after the Trump administration has suggested it may dial back tariffs a bit further and quickly rowed back on suggestions that Fed Chair Powell’s position was under threat. Granted, that may prove a shaky foundation for a sustained recovery, given the President’s often mercurial approach. Nonetheless, our sense is that the greenback has scope to stage a broader rebound over the coming weeks as the effects of the recent turmoil in US markets continue to fade and the unusual gap between the dollar’s level and what interest rate differentials would imply shrinks a bit. We also expect another solid non-farm payrolls figure next week, pushing back further against market participant’s expectations that the FOMC will ease policy in June. That said, the greenback is still hostage to the administration’s whims; it remains to be seen whether the more constructive stance in evidence this week will be sustained for a longer period.