Premature to expect a sustained reversal of US dollar strength – MUFG

The US dollar has continued to strengthen after the recent rebound in global equity markets lost upward momentum. As the Federal Reserve sticks to hawkish message, economists at MUFG Bank expect the greenback to stay on a strong foot.

Expectations for terminal Fed policy rate have fallen recently

“The US dollar has derived support from hawkish comments from New York Fed President Williams who reiterated that the Fed needs to lift their key policy rate to between 3.00% and 3.50% later this year, and then to between 3.50% and 4.00% next year would be ‘perfectly reasonably’. The comments provide some pushback against the recent pullback in Fed tightening expectations.”

“The US rate market has pared back expectations for the terminal policy rate from close to 4.0% to around 3.5%. Those expectations for a dovish shift from the Fed could be disappointed in the near-term unless evidence emerges of an even sharper slowdown for the US economy based on the comments from New York Fed President Williams. It supports our view that it is premature to expect a more sustained reversal of US dollar strength at the current juncture.”