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Defying market expectations yet again, the greenback is trampling everything in its path as it heads toward a second week of gains. With global central banks on a synchronous easing trajectory, turbulence in China weighing on currencies across Asia, and US equity markets marching to new highs, rate differentials and global capital flows remain clearly dollar-supportive.

Mexico’s peso is retracing some of its earlier losses, but remains weaker after the Banco de Mexico delivered a widely expected rate cut, and said it would take a data-dependent approach to future decisions. Voting by a 4-to-1 margin, policymakers yesterday opted to lower the overnight target rate to 11 percent from 11.25 percent previously, but avoided committing to additional cuts, saying they would “assess, depending on available information, the possibility of adjusting the reference rate” at upcoming meetings.

The Chinese renminbi is sharply weaker after the People’s Bank of China set the midpoint fixing rate – around which the currency is allowed to fluctuate within a 2 percent range – 62 pips weaker than during the previous session, temporarily leading traders to suspect that monetary easing efforts were underway. The dollar-yuan exchange rate dropped below the 7.2 threshold and challenged the 7.24 mark, but purchases by state-owned institutions soon helped alleviate selling pressure, suggesting that the central bank intends to relax policy gradually.

Rate differentials are still supporting the dollar: The “dot plot” summary of economic projections presented at this week’s Fed meeting helped ratify market expectations for three rate cuts this year, but also showed that officials are moving in an incrementally hawkish direction, with medium- and long-term forecasts shifting higher. Other central banks are acting in concert to lower policy expectations, with the Bank of Japan delivering a dovish hike, the Bank of England’s hawks capitulating in the face of easing inflation, and the Swiss National Bank and the Bank of Mexico cutting benchmark lending rates this week. On a gross domestic product-weighted basis, the interest rate gap between the dollar and its major counterparts is ticking higher:

Ahead: Canadian retail sales – out at 8:30 – likely contracted by -0.4 percent in January, consistent with Statistics Canada’s preliminary estimate, but traders will likely focus on what the February forecast portends for consumer demand. Canada’s household sector has not yet adjusted to higher borrowing costs, and debt levels will become more burdensome in the months and years ahead as mortgages are renewed. But – contrary to some alarmist numbers in the press recently – consumer insolvencies remain subdued relative to history, suggesting that spending levels might hold up for longer than many expect:

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