US Dollar Index: Medium-term uptrend likely to persist – Westpac

The US dollar remains on a sound footing. This trend is set to persist until the Fed’s frontloaded policy tightening cycle is near to conclude, according to economists at Westpac.

US to avert recession

“Escalating recession risk will periodically undercut the USD, but the US has a couple of cards up its sleeve, among them $2.5trn in accumulated covid household savings and 40-year highs in the US’ terms of trade. That, and the prospect of increased supply in constrained labour and product markets should see the US avert recession.”

“While the US is contending with supply constraints and excess demand, the eurozone is dealing primarily with supply-side issues and the outlook remains fragile. The US is operating substantially further beyond capacity than the Eurozone. Yet, rates markets expect the Fed-ECB cash spread to reverse materially into 2023.”

“DXY a buy the 104 zone, the medium-term uptrend likely to persist until the Fed’s frontloaded policy tightening cycle is nearer conclusion.”