Dollar rises further and the renminbi (finally) falls

Another week of broad-based appreciation has seen the US dollar edge higher even as US bond yields have stalled. Instead, it is the sell-off in equity markets over the past couple of days which has driven the greenback to a new high. In some sense, the dollar is in a “heads I win, tails you lose” situation: either US yields rise further and widening yield gaps help the dollar, or risk appetite worsens on worries about the economic outlook and that drives dollar strength. This is underpinned by the Fed’s ever more hawkish rhetoric and a perception that rapid rate hikes are on the way even if, as we expect, growth slows down – this week’s comments from Fed Chair Powell and other FOMC members only strengthen that view. We think the combination of an aggressive Fed and fragile risk sentiment will continue to drive the dollar up.