Is King Dollar Back Again?

Last week was a tumultuous one across global macro markets, as hopes of “soothing talk” from the Federal Reserve were dashed with Jerome Powell’s speech.

As a result, US10Y pushed higher alongside the US Dollar. This week’s CPI print poses an upside risk for both US10Y and DXY.

On the back of some further position squaring, the DXY also jolted higher last week.

Right now, the big question is whether the jolt higher in the DXY is a short-term correction or the start of something bigger. As we don’t have a crystal ball, we’ll need to rely on probabilities to tell us whether this might or might not be the case.

That means looking at the reasons the market had for selling the Dollar over the past couple of months – and determining whether that has changed.

The biggest driver for the 13% drop in the USD from its March 2020 high to its January 2021 low has been the markets bet on a broad-based global economic recovery, with expectations that the rest of the world will outperform the US.

The Fed’s ultra-easy policy – with its new average inflation target – also meant that the markets assumed the possibility of rising inflation would not spark faster policy normalisations.

Alongside that, the market’s belief that the Fed had its back meant that any drastic tightening in financial conditions would be dealt with via policy tools such as Yield Curve Control or Weighted Average Maturity targeting, or by extending the Supplementary Leverage Ratio – or even doing another Operation Twist.

So, have any of these expectations changed recently? We explore the answer in the video above – and discuss the upcoming US CPI release on Wednesday.