USD: Further weakness in store? – SocGen

In view of Kit Juckes, Research Analyst at Societe Generale, there are two underlying drivers of dollar weakness and the first is that the peak in US growth and in expectations about the likely peak in the fed funds rate as the economic impact of President Trump are all behind us.  

Key Quotes

“The second is that the rest of the world hasn’t been standing still. The euro area economy is gathering momentum, and the ECB is edging towards policy normalisation. The Japanese economy is growing, even if there still isn’t much inflation to scare away fears of deflation. One day, the BoJ too will think about a change of policy, and when that happens, beware the yen!” 

“US employment growth has slowed from a cyclical peak of 2.3% in early 2015 to 1.5%. GDP growth peaked at 3.8% y/y in 1Q15 and averaged 2.1% in 1H17. Since mid-2013, 10-year TIPS yields have repeatedly failed to reach 1%, and last December’s spike coincided with the dollar’s peak. Today, yields are tumbling and the dollar’s going with them. This feels very much like a clear-out of remaining bearish bond and dollar bullish positions. That may set the stage for a period of consolidation. But after that, the danger is that the US economy merely trundles along and the focus remains firmly on the shifting economic and policy outlook elsewhere.”