Federal Reserve officials are clearly signalling increasing discomfort with the level of restrictiveness implied in real policy rates. If all else were equal, the dollar would come under sustained selling pressure in the months ahead.

But exchange rates have already moved dramatically: Hedge funds and other large speculators are holding a net short position against the dollar for the first time since September, and the greenback has fallen more than 4 percent from its October highs as markets have turned optimistic on returns outside the United States.

And all else isn’t equal: Although inflation is headed in the same direction across the planet, differences in sensitivities could mean that yields come down harder outside the US. Having undergone a painful deleveraging process after the 2008 global financial crisis, US household and corporate balance sheets look solid in comparison with their international brethren. 30-year mortgages mean a smaller proportion of homeowners is exposed to an interest rate shock, and – because the bulk of American firm-level financing is done through bond issuance – debt rollover costs are spread over much more manageable time horizons than in the more bank-dependent British, Canadian, and European financial systems.

GDP-weighted rate differentials

The economic consequences of post-pandemic monetary tightening are still likely to be felt more acutely in rate curves elsewhere. The appeal of previously-strong high-carry units could diminish in the months to come as emerging market central banks move to cut policy more aggressively, and the extent to which currencies like the euro—which still makes up almost 58 percent of the DXY dollar index—can sustainably strengthen, looks relatively limited.