ECB steals the show, but the dollar rebounds

After a choppy few days in financial markets, the US dollar is ending the week a touch stronger against most other major currencies as risk sentiment has worsened sharply in the wake of the latest round of central bank meetings. We suspect this will prove the end of the correction that has seen the DXY index fall almost 10% since its peak in late September. Admittedly, we have revised our forecasts for the dollar against the euro, sterling and the renminbi and now anticipate a lower peak in the dollar than we previously projected. That reflects a judgement that the European economy is holding up better than we had thought (helped by the fall in natural gas prices since September) and that the outlook for China’s economy – while fraught in the near-term – will improve more rapidly in the second half of next year. But we continue to think that the conditions for a sustained drop in the dollar are not in place, and we expect a further leg up in the dollar in the first part of 2023.