The US dollar is again ending the week on the backfoot in the wake of yesterday’s softer-than-expected US CPI report and what looks (potentially) like another round of FX intervention from Japan’s Ministry of Finance. Short-term momentum has now shifted against the greenback; between better-behaved inflation data and slowing activity, expectations that the FOMC will at long last start cutting the fed funds rate in September have firmed up. By itself, that is likely to prove a major headwind for the dollar. However, we think the main beneficiaries of further dollar weakness will be the yen and other Asian currencies (where interest rate expectations are unlikely to fall back much). We still think most currencies elsewhere – notably the euro and sterling – will falter a bit as improving inflation news like that in the US and a mixed outlook for economic growth means that interest rate expectations drop back in line with, or even more than, the US.
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