We expect the dollar bull market to continue

Although the dollar’s rally has stalled over the past six weeks or so, and may tread water for a while longer, we think that it will ultimately appreciate a bit further this year and next. The key driver of the greenback’s rise since the middle of last year has been the Fed’s increasingly hawkish stance in response to a robust economic recovery and surging inflation pressures in the US. We expect that the Fed will deliver at least as many rate hikes as now discounted in money markets, and a significantly more aggressive pace of “quantitative tightening” than in the previous tightening cycle. In contrast, we think many other central banks will fall short of the pace and/or extent of monetary tightening that investors now appear to expect. In other words, we anticipate that rate differentials will continue to shift in favour of the greenback. We also think that the Fed’s apparent desire to tighten financial conditions in the US (which, if successful, would almost certainly affect global conditions) will continue to keep riskier currencies, especially in emerging markets, under pressure.