Green shoots emerging for dollar comeback as Fed unlikely to cave into rate cuts By Investing.com

Investing.com – The bears on the dollar look set to score a second monthly victory for dollar bets, but some see green shoots spreading for the battered currency on bets that the Federal Reserve is unlikely to succumb to pressure to cut interest rates later. year.

The currency pair, which measures the greenback against a basket of six major heavy currencies, fell 0.47% to stay on track for a second straight monthly loss.

“We see the US dollar moderately stronger from here – we expect the broad dollar index to rise by up to 5% in the second half (2nd half of the year),” Oxford Economics said in a recent note.

Oxford Economics adds that expectations for a return of the dollar later this year are driven by expectations that “the Fed will not pivot in the second half.”

Expectations of a pivotal Fed presence helped lower the hammer on the dollar, which pushed it to one-year lows earlier this month.

But recent economic data indicating that the banking crisis is still flat and that the banking crisis is not as bad as many had feared so far has forced many to reassess their pessimistic expectations about Fed rate cuts, sending the Treasury higher from its recent lows. .

Markets’ expectations for a May 3 rate hike are almost entirely priced in, according to Investing.com, while only one rate cut is currently expected in 2023. That’s a far cry from the 100 basis points of rate cuts priced in just a month ago when The banking crisis appeared.

It could also play a role in the dollar’s recovery, adds Oxford Economics, which makes up about half the weight in the broad dollar index, as markets place great confidence in the European Central Bank keeping interest rates higher for longer.

“The market is very optimistic about the prospects for rate hikes in the eurozone… beyond 2023 even if inflation proves to be more flat for the time being,” said Oxford Economics.

Others, however, believe that shying away from bets on Fed rate cuts would provide limited runway for the dollar to rebound as the Fed’s pause after May remains the overall consensus.

The range for US Treasury yields to continue rising from here should be further limited, MUFG said, pointing to recent comments from Fed members showing a somewhat tepid appetite for further hikes after May 3rd.

MUFG added: “Recent comments from NY Fed President Williams indicated he would be comfortable with the Fed making just one hike and then pausing the hiking cycle.”