USD: Recent correction lower is likely to prove temporary – MUFG

Some of the shine has been taken of the strong US dollar but case for more sustained and deeper sell off is not yet compelling, explained analysts at MUFG Bank. They consider that global growth fears are supportive for the greenback. They added the Federal Reserve policy pivot is not yet sufficiently dovish. 

Key Quotes:

“The USD has clearly lost some of its shine in recent weeks. The pullback for US yields and tentative improvement in global investor risk sentiment have both weighed on the US dollar alongside intensified US recession risks. It leaves the USD vulnerable to further near-term weakness. However, we are still not convinced that the broad-based USD sell-off will be sustained beyond the near-term. The Fed’s policy shift is not sufficiently dovish enough which when combined with global slowdown/recession fears that are set to intensify further, we believe the recent correction lower the USD is likely to prove temporary. One exception is USD/JPY where we are more confident that the USD could have already peaked against the JPY.”

“Recession fears and the accompanying drop in US yields has triggered an abrupt correction lower for USD/JPY over the last couple of days with the pair falling by around 5 big figures as it moves further below last month’s year to date high of 139.39. Recent developments have made us more confident that USD/JPY could have already peaked alongside long-term US rates. Market expectations for policy divergence between the Fed and BoJ are now starting to narrow as the US rate market looks ahead and prices in more rate cuts into next year.”