Between a dovish message from the FOMC on Wednesday and a shockingly weak non-farm payrolls report today, the dollar is ending a turbulent week on the back foot. US interest rate expectations have seen a massive drop as recession fears now appear to have decisively overtaken inflation worries as the key concern among market participants. So far, the shift in expected interest rate differentials against the US has outweighed the deterioration in risk sentiment: most major currencies have risen a bit against the dollar today, and on the week as a whole. If the recession narrative takes hold in earnest, we would expect that to change, and the dollar to rebound as safe-haven demand becomes the dominant driver in currency markets. That would probably see the yen – which has already surged further this week – continue its extraordinary rebound.
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