It was a month of two halves with initial US dollar strength reversing by month-end fuelled in part by the updated policy guidance by the Fed at the FOMC meeting. The basis of the US dollar depreciation view of economists at MUFG Bank is that many other G10 central banks will be tightening policy before the Fed as global growth remains robust.
DXY weakness will vary versus G10
“Our take-away from the updated guidance is that QE tapering will not be rushed and the prospect of an earlier than expected taper announcement, say in September, has diminished. The key statement that the ‘Committee will continue to assess progress in the coming meetings’ suggests the assessment on meeting ‘further substantial progress’ will take longer.”
“The July FOMC communications appear to have helped restore credibility in the new monetary policy framework that implied a looser for longer monetary stance in order to lift inflation expectations.”
“Add an expanding current account deficit and you have the recipe for further USD depreciation ahead. Strong domestic demand will likely mean the current account deficit becomes a bigger drag on USD performance given yields will be lower for longer.”
“We believe the latest Fed communication reinforces the prospect of renewed USD weakness. However, the weakness will be more specific to G10 FX where central banks will shift to a tighter stance. Versus EUR and CHF for example, we expect limited USD weakness.”
