Stage set for payrolls to renew the rally in the dollar

Amid the broad-based “risk-on” tone in markets this week, the US dollar has edged down against most major currencies. As was the case last week, an increasingly hawkish tone by the Fed and a rise in 10-year US Treasury yields had little impact on the greenback. This may be due to the broad-based nature of the tightening cycle; indeed, this week central banks in Norway, Mexico, and other countries continued to tighten policy. Although this may mean the dollar makes little headway in the near term, will still think there is scope for the  greenback to grind higher as commodity prices fall back from their highs and long-term yield gaps widen in favour of the dollar. Our latest forecast revisions point to continued weakness in the currencies of European countries, in particular, given we expect the war in Ukraine to weigh most heavily on activity there. Next week’s employment reports and business and consumer surveys from the euro-zone and the US will shed more light on the war’s relative impact on activity, and may prove the next catalyst for a rally in the dollar.