There may be little potential for USD gains to develop further – Scotiabank

NEW YORK (February 28) The US Dollar Index (DXY) recovers above 104.00. Economists at Scotiabank analyze Greenback’s outlook. 

Spreads have moved only marginally in the USD’s favour over the past month

Although markets continue to reprice Fed rate cut risks in the coming months (Fed swaps imply only 75 bps of easing through the end of the year now, about half of what was priced in at the start of February), this is not an obvious driver of USD gains because implied rate cuts by other central banks have been slashed as well. 

Spreads have moved only marginally (5-6 bps for 2Y spreads) in the USD’s favour over the past month and the DXY is still trading above my estimated fair value (based on DXY-weighted yield differentials) which sits at 103.04 today. 

There may be little potential for USD gains to develop further, in other words.

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