Dollar Dominance

April 12, 2024

Dollar Dominance

  • The University of Michigan preliminary April consumer sentiment report will offer a fresh update on the US household spending outlook.
  • UK GDP rose slightly in February. Inflation in Sweden cools faster than expected in March.
  • Peru’s central bank unexpectedly resumes its easing cycle. The monetary Authority of Singapore and Bank of Korea stand pat.

USD is building on recent solid gains, the sell-off in Treasuries eased and US equity futures are largely flat. In our view, higher US yields and US economic outperformance will continue to underpin the dollar’s uptrend.

Fed officials are reacting to the sticky US inflation backdrop by urging more patience before easing. New York Fed President John Williams said there was no need to adjust policy in the “very near term”. Richmond Fed President Thomas Barkin noted it’s “smart to take time” to see if inflation slows. Boston Fed President Susan Collins cautioned it may take more time than thought for confidence to cut and added that less easing may be warranted this year than thought.

The University of Michigan preliminary April consumer sentiment report is today’s highlight (3:00pm London). Headline is expected at 79.0 vs. 79.4 in March consistent with resilient household spending activity. 5- to 10-year inflation expectations are seen rising a tick to 2.9% which should keep the Fed cautious.

EUR/USD is heavy around 1.0710 on widening policy divergence between the ECB and Fed. Yesterday, the ECB kept policy interest rates on hold but suggested a June rate cut is in the pipeline. First, the ECB policy statement made it clear that if disinflation continues, “it would be appropriate to reduce the current level of monetary policy restriction.” Second, President Lagarde noted that while a few members backed a rate cut today, a very large majority of members wanted to wait for June. The ECB’s updated inflation projections are released in June.

ECB governing council member Martins Kazaks was more upfront this morning saying he expects a rate cut in June “if nothing surprising happens”. ECB executive board member Frank Elderson gives a keynote speech today (12:00pm London).

GBP/USD is trading on the defensive on USD strength. GBP is higher versus EUR as the Bank of England (BOE) is in no rush to ease policy. The UK economy is on track to recover quickly from its end-2023 technical recession. In line with consensus, the UK economy grew 0.1% m/m in February after rising by 0.3% in January (revised up from 0.2%). The production and services sectors were the largest positive contributor to growth driven by manufacturing output and transportation/storage. Construction was the main drag. Money market price-in 80% odds of an August BOE rate cut.

BOE releases a report on its economic forecasting by former Fed Chair Bernanke (12:00pm London). Governor Bailey has said that he expects the bank to drop its so-called fan charts in favor of a new regime.

SEK is underperforming. Inflation in Sweden cools faster than expected in March, suggesting the Riksbank will start easing in May. The policy relevant CPIF inflation rose just 0.1% m/m (consensus: 0.4%) in March and slowed to 2.2% y/y (lowest since July 2021). Excluding energy, CPIF was flat in March (consensus: 0.3%) and eased to 2.9% y/y (lowest since January 2022).

USD/JPY is holding around 153.00. Ongoing threat of intervention is cushioning the yen’s slide. Japan’s Finance Minister Shunichi Suzuki warned again he’s not ruling out any options to respond to excessive currency moves.

Peru central bank surprises again and resumes its easing cycle. The bank unexpectedly cut the policy rate 25bps to 6.00% (12 of 13 analysts polled by Bloomberg expected no change) noting it considered the monthly increase in inflation in March as “transitory”. At the last meeting March 7, the bank delivered a hawkish surprise and kept rates steady at 6.25% vs. an expected 25bps cut.

Nevertheless, PEN strengthened because the government approved a private pension withdrawal bill that would allow Peruvians to tap as much US$7bn from their nest eggs. The aim is to support the beleaguered Peruvian economy which has contracted in every quarter of 2023.

The monetary Authority of Singapore stands pat. According to the bank, the Singapore economy is expected to strengthen over 2024 and the prevailing rate of appreciation of the Singapore dollar nominal effective exchange rate policy band is needed to ensure medium-term price stability.

Bank of Korea kept rates kept the policy rate steady at 3.5%, as was widely expected. But the tone of the statement and the governor’s comments were slightly dovish. The bank expects the restrictive policy stance to continue “for a sufficient period of time” versus “sufficiently long” period previously. Meanwhile, Governor Rhee said the board is open to a rate cut if inflation slows in the second half of 2024. The swaps market implies a small 30% probability of a rate cut over the next 6 and 12 months. KRW is underperforming across the board.

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