Weaker-than-expected US data and a dovish shift from the FOMC have led to a sharp fall in interest rate expectations in the US, driving the dollar down as the market turmoil at the start of August has largely unwound. The yen has continued to rally, as yield gaps have shifted in its favour; our sense is that it could rise further still – with the BoJ tightening policy while the global easing cycle broadens out. That said, our base case remains a soft landing in the US, which would imply a bit of a rebound in US rate expectations. In turn, that would suggest the dollar may rebound a bit against most European currencies in the near term, but probably still weaken against most Asian ones as the FOMC starts its loosening cycle in September. On a longer horizon, the dollar remains overvalued, and we expect it will weaken over 2025-26 – although the threat of higher tariffs under a Trump administration is a key risk to that view.
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