US dollar see-saws on Ukraine risk & FOMC minutes

Although it has rebounded today, the US dollar lost a little ground against most major currencies over the week as a whole, as the FOMC minutes prompted a scaling back of market expectations for Fed tightening and risk sentiment see-sawed on continued Russia-Ukraine tensions. The market reaction to the FOMC minutes was fairly limited, but highlighted how high the bar now is for further increases in short-term yields in the US. We suspect that the scope for further dollar strength through this channel is limited in the near term. But we believe that the ‘terminal rate’ discounted in US money markets is low and will eventually rise. That is why we continue to think that longer-dated yield differentials will shift in favour of the US dollar, which we expect to keep the greenback on the front foot over the next year or two.