FX Talking: 'You Wanted A Weaker Dollar'

Baseline forecasts tend to have a limited shelf life. But here's what we're thinking. Tariff uncertainty looks likely to be with us for a few more months, and with sticky inflation tying the Fed's hands, asset markets could see some more volatility. An extreme risk premium going into the dollar could be worth something like 1.16/17 in EUR/USD and 138 for USD/JPY. 100bp of Fed easing in the second half should then calm risk assets.

Unless there is some surprise grand bargain between the US and China, expect the defensive yen and Swiss franc to continue performing well. An extra layer of interest here is whether Treasury Secretary Scott Bessent's trade negotiations with Japan and South Korea deliver some kind of agreement to strengthen their currencies. But certainly, the environment for FX intervention to limit currency strength is turning more adverse.

As for the renminbi, we continue to expect Chinese policymakers to resist devaluation pressures. Equally, we very much doubt they've been selling US Treasuries in retaliation. Looking at the broader EM complex, we note that CEE currencies have been performing quite well, and of the pack, we would favour the Czech koruna to continue to do well.

Chris Turner, Global Head of Markets and Regional Head of Research for UK & CEE

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