The rally in the US dollar pauses ahead of the Fed

After a series of strong weeks left it at two-decade highs, the US dollar seems set to end this week lower against most major currencies. Despite weaker-than-expected activity data out of the US, UK, and euro-zone this week, cyclically sensitive (i.e., “high-beta”) developed market currencies strengthened the most against the dollar. This coincided with a rally in “risky” assets and a fall in government bond yields; this appears to reflect a view that weakening economic activity will reduce the need for additional monetary tightening. But we doubt slowing economic growth in the US and other major economies – or recessions in the cases of the UK and euro-zone – will bring inflation down to target in the absence of more interest rate hikes by central banks. Indeed, we expect the Fed to deliver another 75bp hike next week and raise rates into 2023. Amid a backdrop of a hawkish Fed and slowing global growth, we think the dollar will resume its broad-based strength before long.