Déjà vu after all for the dollar

The dollar is ending the week on the back foot, with the DXY index on track for its worst week since July, after this week’s US CPI print came in softer than expected. That has reinforced the growing consensus that US inflation is on track back to target and the FOMC’s rate hiking cycle is over: money markets now discount close to zero chance of another 25bp hike (down from ~25% at the start of the week). The drop in the dollar, and the relief rally across equity and bond markets, is very similar to the reaction to the same US CPI report a year ago – and arguably harder to justify, given the data miss this time around was relatively small. As we set out here, we don’t think that this “Goldilocks” environment will be sustained (although, it could certainly last for a few weeks). That is why we are sticking to our view that the dollar and other safe haven currencies will fare best over the coming months as the benign “soft landing” narrative gives way to a more pronounced slowdown and, at the very least, a recession scare in the US. Historically, the ends of Fed tightening cycles have been accompanied by economic slowdowns and a stronger dollar.