Prospects for central bank tightening remain in focus

In a fairly quiet week for currency markets, the minutes from the FOMC’s April meeting proved the highlight. The US dollar rose sharply on the news that at least some Fed officials are keen to start ‘talking about talking about tapering.’ While that rally proved short-lived, it points to the key questions hanging over currency markets: when, and how quickly, will the Fed tighten policy? And how will the pace of its normalisation process compare to that of other central banks? Our view remains that most central banks, including the Fed, will not raise interest rates as soon as money markets now discount. But the difference between our expectations and those of investors is smaller in the US than in most other countries, and the strength of the US recovery and growing upward pressure on inflation there suggests to us that US Treasury yields will resume their rise. That is the key reason why we expect a stronger dollar.