USD: Relative appeal has been boosted – MUFG

Lee Hardman, Currency Analyst at MUFG, notes that the US dollar has remained on a stronger footing in the Asian trading session after the US dollar index rose to its highest level yesterday since the 10th March.

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“The US dollar has regained upward momentum following the Brexit vote which has boosted its relative appeal especially against European currencies. Building monetary easing expectations outside of the US are helping to support a stronger US dollar.

Within the G10 space, the BoE, BoJ, ECB, Norges Bank, RBA, and RBNZ are all expected to ease monetary policy further this year. In contrast, the Fed is expected to leave its monetary policy unchanged and may even resume rate hikes later this year. The recent trend of stronger economic data releases from the US is keeping alive expectations that the Fed will continue to tighten monetary policy although the market remains unconvinced yet that the Fed will be confident enough to resume rate hikes this year.

Heightened uncertainty ahead of the Presidential election and doubts over the sustainability over stronger US growth are contributing to the market’s still dovish outlook for Fed policy which is helping to dampen US dollar strength in the near-term.

However, the relatively modest financial market fallout from the Brexit vote has increased the likelihood that the Fed will resume rate hikes earlier than the market is currently expecting. The US equity market has risen to new record highs and US dollar strength has been more modest than some feared. So far renewed US dollar strength has been narrowly focused as evident by the Fed’s broad-based US dollar index which has remained relatively stable and still around 3% below its peak from in January.

Without a material tightening of US financial conditions, the negative impact for the US economy from the Brexit vote should be limited. Headwinds to the US economy from the past sharp strengthening of the US dollar and hit to capex from the sharp drop in the price of oil are also beginning to fade. Overall, the latest developments are consistent with our outlook for further modest US dollar strength.”