Under “normal” circumstances, the dollar could have been expected to strengthen further over recent months in response to higher US interest rates. However, the authors of a JPMorgan research note issued in late March observe that almost half of all the central banks globally increased rates in the first quarter of the year – a trend that was conspicuously absent during previous hiking cycles.
Front-end yields have increased more in the US this year than in other G10 countries, but the global nature of the rise in inflation means yields are moving higher across the board and at considerable speed.
The market has now gone quite a long way towards pricing Fed tightening risks, both in terms of frontloading the hikes and pricing rates to persist higher for longer
“The European Central Bank, for instance, is now priced to take rates positive by the end of the year, which if delivered will have a positive impact on EUR/USD even if the Fed continues its own hiking cycle,” says Shreyas Gopal, FX strategist at Deutsche Bank.
Themistoklis Fiotakis, global head of FX and EM macro strategy at Barclays, agrees that the dollar rally has been lacklustre considering the scale of the move in US fixed income and the idiosyncratic shocks hitting the euro and the yen as well as the broad pick-up in risk aversion evident in equity market volatility.
“We
