Fed Near Neutral Signals Caution Ahead, Shifting Focus to Fixed Income in 2026 
Austan Goolsbee Signals Potential for More Fed Rate Cuts as Inflation Shows Improvement 
Bank of Korea Downplays Liquidity’s Role in Weak Won and Housing Price Surge 
RBA Holds Rates but Warns of Rising Inflation Pressures 
Bank of Japan Poised for Historic Rate Hike as Inflation Pressures Persist 
South Korea Warns Weak Won Could Push Inflation Higher in 2025 
Brazil Holds Selic Rate at 15% as Inflation Expectations Stay Elevated 
New cycle highs: Between late January and May, the US dollar fell 7.5% as an EM sell-off triggered (downward) revisions to expectations of Fed rate hikes and dragged 10y TIIPS yields down from over 70bp to below -10bp. But after meandering sideways through the summer, real yields have moved back up and the dollar has followed. On a trade-weighted basis, it’s now higher than it was at the start of the year.
Ever since the Trump’s US presidential election victory in November, the DXY has risen over 10.3% so far, major backed by higher front-end core yields as markets have repriced a reflationary outlook from expansionary US fiscal policy.
Policy mix extends USD cycle: the stronger growth, excitement about the potential effects of tax cuts and expectations of faster monetary tightening will take the dollar higher in H1’17, but like Icarus, it’s in danger of flying too close to the sun. It can rise while Europe is beset by political uncertainty and while the consensus is that President Trump will deliver faster growth but only slightly higher inflation, but if political concerns ease in Europe, the euro will likely bounce.
If the dollar does some of the Fed’s work for it, if stronger demand boosts the US trade deficit and if real yields are eroded by a further pick-up in inflation expectations, then the dollar rally should grind to a halt. It is not so much a case of Mr. Trump having feet of clay, as the dollar having wings of wax.
Where and when to fade USD strength: Fed has raised its hiking bias from 2 to 3 more hikes in 2017 that could hinder upside potential of this underlying pair.
Moving on the dollar, although FED has provided the substantial cushion to USD with its hawkish tones of monetary policy. Due to the Donald Trump's presidential election, the dollar continued to get a booster in conjunction with FED, whereas Euro is still clouded with Brexit and French & German polls, as a result, EURUSD heading for parity.
We expect EURUSD to trough around parity, before the French elections, unless Front National candidate Marine le Pen wins the presidency (in which case the low would be lower and later). USDJPY has further to run as the BoJ anchors nominal yields, but above 120, momentum should slow. We expect yield-seeking investors to return to EM currencies from Q2 onwards.
