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Analysts at MUFG Bank, continue to see scope for the US dollar to extend its advance in the near-term, especially if conditions remain more challenging for risk assets. They point out the greenback started to rebound especially against high beta G10 currencies and the upward momentum for risk assets has stalled. 

Key Quotes:

“The USD has staged a modest rebound over the past week. It has outperformed all other G10 currencies with strength most evident against the NZD (-2.8%), GBP (- 2.1%) and AUD (-1.5%). In contrast, the low yielding “safe haven” currencies of CHF (0.0%), EUR (0.0%) and JPY (-0.6%) have held up better against the USD. Recent FX performance in part reflects more challenging conditions for risk assets. The MSCI world equity index has lost upward momentum after peaking at the end of last month following a rebound of around 30% from 23rd March low.”

“The USD has derived support as well from comments by Fed Chair Powell that “the committee’s view on negative rates has not changed…this is not something we’re looking at”. He noted that the impact of negative rates is “very mixed”. It sent a clear signal that the Fed is unlikely to implement negative rates in the foreseeable future and will put a dampener on building market speculation.”

“At the current juncture though, the Fed is scaling back of the pace of easing as market conditions have improved. It has  slowed the pace of daily UST purchases to an average of USD7 billion down from a peak of USD75 billion in March providing less of a headwind for the USD. At the same time there has been a notable change in tone from President Trump with regards to the USD over the past month. He repeated yesterday that it is a “great time to have a strong USD” and claims responsibility for keeping it strong. It marks a shift back to the strong USD policy.”

“In these circumstances, we continue to see scope for the USD to extend its advance in the near-term especially if conditions remain more challenging for risk assets.”