Does the USD rally have legs? - NBF

The trade-weighted USD managed to claw back in April some of its earlier losses as solid U.S. data raised odds of more aggressive Fed interest rate hikes and one can expect periodic bouts of USD strength coinciding with events tied to the Fed’s tightening of monetary policy or risk-off sentiment that precipitate safe haven flows, according to analysts at NBF.

Key Quotes

“The greenback could struggle if investors realize that the flattest yield curve in over a decade effectively restricts the Fed’s abilities to tighten policy too much. One should also note that a ballooning budget deficit has historically been correlated with a weakening greenback. All in all, while acknowledging that the USD could get a temporary lift, we continue to expect the big dollar to weaken over the forecast horizon.”

“Much of the USD’s gains in April came at the expense of the euro. The common currency slid as the European Central Bank highlighted the deceleration of the zone’s economic growth and mounting risks of protectionism. While those uncertainties and the lack of inflation mean the ECB will remain patient on rates, the anticipation of tighter monetary policy in late 2018 or next year could help push up the euro over the coming quarters. As such, we continue to expect the common currency to bounce back against the USD in the second half of the year.”