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Dollar Juggernaut Slows, But Remains Powerful

Treasury yields are slipping and the dollar appears on the verge of snapping a five-day winning streak, but losses look likely to remain moderate after Fed chair Jerome Powell effectively reset the clock on rate cuts, suggesting that the central bank would need to see several more monthly inflation reports before beginning to ease policy. Speaking during a question-and-answer session in Washington yesterday, Powell said “The recent data have clearly not given us greater confidence” in inflation’s return to target, and “instead indicate that it is likely to take longer than expected to achieve that confidence”. “We think policy is well positioned to handle the risks that we face,” he said. “Right now, given the strength of the labour market and progress on inflation so far, it’s appropriate to allow restrictive policy further time to work.”

Markets now see the Federal Reserve delivering fewer than two rate cuts in 2024, with the implied year-end policy rate back up to 4.9 percent – above the levels that prevailed before the “pivot” in narrative that triggered a wholesale easing in global financial conditions last October.

The Canadian dollar is trading near a six month low after yesterday’s softer-than-expected inflation report highlighted the country’s growing underperformance relative to the United States. The Bank of Canada’s preferred price growth measures declined for more than forecast, and the CPI-X index, which excludes eight of the most volatile categories including gasoline and mortgage interest costs, fell to 2 percent year-over-year, down from 2.1 percent in the prior month. Markets are now assigning 65-percent odds to a move at the Bank’s June meeting, with roughly 2.5 cuts priced in by year end.

Currency markets were unmoved when the ruling Liberal government tabled a budget that will increase spending across dozens of categories while raising capital gains inclusion tax rates from one-half to two-thirds for individuals and corporations. The package looks unlikely to pull Canada out of its productivity malaise, but put together with the billions in new spending initiatives announced by the provinces in recent weeks, could deliver a “fiscal impulse” – the net effect of government spending on the economy – that is slightly more positive than the Bank of Canada’s last set of projections.

The British pound is advancing after inflation slowed less than anticipated last month, leading markets to further reduce bets on the number of rate cuts expected from the Bank of England this year. Consumer prices rose 3.2 percent on a year-over-year basis in March as gasoline prices climbed, and core inflation came in at 4.2 percent, down from 4.5 percent in the prior month, but slightly above the consensus economic forecast. Services-sector price growth remained stubbornly elevated at 6 percent, down from 6.1 percent in February, but well above estimates from economists and the central bank itself, which had pencilled in a decline to 5.8 percent.

Ahead today: The Beige Book survey should give economists insight into how conditions are evolving in each of the Fed’s twelve districts, but monetary policy implications might be too nuanced for markets. Both Cleveland’s Loretta Mester and Governor Michelle Bowman will speak this evening.

Overall volatility in foreign exchange markets is beginning to climb. Although many observers have pinned the blame for increased turbulence on geopolitical tensions, we suspect the upward shift in US growth expectations is doing much of the heavy lifting by helping put the Federal Reserve on a different trajectory relative to its developed-market peers. Last week’s inflation shock, Monday’s remarkably-robust retail sales report, and yesterday’s commentary from Chair Powell have had a profound impact on the global yield landscape, and further ructions seem likely if growth differentials continue to diverge.

Market Retreat Continues as Yields Climb
Hawkish Kashkari Comments Pour Cold Water on Markets
Market Momentum Fades After US Long Weekend
No news is good news
Dollar Cruises Toward Weekly Gain on Fading Easing Expectations
Twists & turns

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