FX Viewpoint: USD: Not struck out

Politics is increasingly in the spotlight and can sometimes move exchange rates. The US Dollar Index (DXY) broke below support at around 104 following a Bloomberg interview with former US President Donald Trump, who reportedly claimed that the USD is too strong versus the JPY and RMB, which resulted in these currencies strengthening (Bloomberg, 17 July 2024).
However, while FX can be swept up in politics and our confidence has been dented by recent USD weakness, our FX framework suggests the move lower will not be sustained. The US economy continues to hold up better than others. Second, the Federal Reserve’s (Fed) easing cycle is likely to be modest, amid no sign of a material US downturn. The recent Fed rhetoric still embodies patience and gradualism. None of this supports the current rates market pricing, which points to about 60bp of Fed easing by end-2024 (Bloomberg, 18 July 2024).
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