Analysts at NBF suggest that the U.S. dollar had a rather eventful May as the month started well for the currency as solid U.S. economic data, which hinted at a sharp acceleration of U.S. GDP growth in Q2, propelled the trade-weighted USD to its highest point since July.
“But then came dovish Fed minutes which made clear the FOMC would accept “a temporary period of inflation modestly above 2%”, taking some steam out of the currency. The return of risk aversion in the last week of the month, courtesy of Italy’s political crisis, then reenergized the greenback via safe haven flows, allowing it to register an overall appreciation over the month.”
“May’s market gyrations are a reminder that currency volatility should be expected in the current environment of enhanced uncertainties about the economy, policy and politics.”
“Does the USD rally have legs? As we saw in May, there will be bouts of USD strength with events tied to the Fed’s tightening of monetary policy or risk-off sentiment that precipitate safe haven flows. But we continue to expect the greenback to trend lower over the forecast horizon in part because of diverging monetary policies. The Fed’s abilities to tighten policy is indeed restricted by the flattest yield curve in a decade â”€ the yield spread between 10-year and 2-year Treasuries is now less than 50 basis points â”€ and the belief within the FOMC that the fed funds rate could soon be at or above neutral.”