The US dollar rose for a third week in a row, reaching its strongest level since early 2017 as the growing policy divergence between the major Asian central banks and the rest of the world as well as concerns about Europe’s energy supply added fuel to greenback’s rally. While government bond yields and risky assets have held broadly steady ahead of next week’s FOMC policy announcement and US payrolls, sentiment appears fragile and implied volatility remains elevated across equity, bond, and currency markets. With expectations for Fed policy increasingly aggressive – money markets now discount not only a 50bp hike next week, but a decent chance of a 75bp (!) hike in June – there is arguably ample scope for the FOMC’s announcement to take some of the heat out of the dollar rally. However, given that tighter financial conditions and (implicitly) a stronger dollar is precisely what policymakers have aimed to bring about in order to combat inflation, we doubt they will ease off any time soon. In addition, we expect Friday’s US non-farm payrolls report to indicate that the labour market remains extremely tight, although wage growth may be starting to slow.
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