The stalemate in currency markets continues

After a strong start to the year, the US dollar seems set to end the week broadly unchanged against most currencies, as inflation data releases out of the US this week failed to generate much of a reaction. This stalemate in currency markets has been a common pattern over the past year or so, and we think this will probably continue for the next couple of quarters. For the greenback to break higher, it would probably take either a severe economic downturn or a US economy so resilient that it would prompt the Fed to delay rate cuts. Conversely, the dollar would probably break to new multi-year lows if the Fed follows through with its rate cuts amid lower inflation and growth in the US. While the sharp swing in US rate expectations since November suggests to us there is scope for Treasury yields and the greenback to rise a bit more in the short term, our sense is that the Fed’s easing cycle amid strong risk sentiment will gradually push the dollar lower by year-end.