The U.S economy has proven to be remarkably resilient .as underscored by strong inflation and labor market data consequently , the prospect of less easing by the federal reserve (Fed) this year has taken the Dollar to new highs -and should underpin its Strength going forward.
Strength in U.S. activity has been a mainstay of our long Doller bias , and the persistence of U.S exceptionalism is a major FX theme. But this has always been in the context of high market conviction that the fed would invariably begin its easing cycle this year , said Meera Chandan ,Global FX strategist at J.P. Morgan . this is now being challenged , and the Corresponding de-pricing of fed cuts has taken the Doller to new year -to- date highs. put simply ,the macro year ,and has taken the dollar higher Commensurately.
However the ongoing improvement in Global growth could temper the performance of the greenback , considering the currency tends to appreciate during times of risk and vice versa .J.P Morgan research has raised the odds of a high for -long “soft landing to 55%.while purchasing managers, index(PMI)data continue to signal improving breadth and inclusiveness in the global economy.
“there have been several meaningful developments on this front of late weighing on the doller given its anti -cyclical properties. this may impede what otherwise looks like a potentially strong U.S-led dollar environment .though we question whether it can fully offset ongoing U.S. exceptionalism , Chandan added .
In addition commodities are once again top of mind for the FX space as thev complex has risen almost 7% off February lows . furthermore , Russia decision to cut oil production could push brent prices to $100 bbi in the coming moths which could benefit the dollar .
This is in part due to the dollar positive correlation with oil. since late 2022 the dollar has tended to move in tendem with oil.especially during supply driveng episodes in the energy markets .such episodes fuel infiation while aslo pressuring growth.thus supporting the dollar .
The potential move to $100/bbi would therefore be dollar -positive through the interplay of the dollar anti cyclicaltiy higher headine inflation and higher yields,chanan said.
the greenback’s fading sensitivity to commodity prices also refiects structural changes in the U.S bakace of payments that have taken place over the last two decades . the U.S now produces around 12 million barrels per day 9mbd) of crude and has drastically reduced needs are now flat and its trade deficit no longer mirros shits in energy imports .AS such swings in energy prices no longer affact the U.S balace of paymentas the way they once did to the dollar benifit .
Overall the dollar looks well placed to withstand a further rise in oil prices We also continue to plece strong emphasis on yields ans the implications of higher for longer and remain constructive on the USD Chandan said J.PMOrgan research remains bearish on the euro epecially if the European centrak bank (ECB) cuts interest rates sooner than the fed this will widen the interrest rate gap beween the U.S and the eurozone ,putting downward pressure on the euro against the dollar .
