Morning Brief – Opportunity for a weaker Dollar

Charles Porter
Thu 1 Jun 2023

Opportunity for a weaker Dollar 

The passing of month-end allows markets an opportunity to reassess currency valuations. Despite a cooling off within the Dollar as forecasted following the agreement between the White House and Kevin McCarthy, month end flows yesterday showed favourable conditions for a short-term Dollar resurgence. The beginning of June coincided with headlines last night that the House of Representatives passed the debt ceiling agreement. Now passing to the Senate for approval, the deal looks certain to pass but it remains uncertain whether this will be done in time to avoid severe fiscal consequences.  

Yesterday also delivered the markets headlines regarding the intended path of the Federal Reserve this month. Philip Jefferson, member of the Board of Governors, shared similar comments to the Philadelphia Fed President of an expected pause in the hiking cycle in June. Whilst the market was already pricing a slowdown in hiking, this confirmation continues to provide the monetary environment required to allow the Dollar to weaken. Both Fed officials did of course note the ability of the central bank to raise rates further should inflation persist. 

There are risks to this view of a weaker Dollar, however, balancing those risks does indicate a weaker USD is likely. A risk to this view includes significant data publications that are due from the US in the trading days ahead. This data will qualify and test the Fed’s conviction for a June pause and could undermine the current view of policy makers. Similarly, whilst the debt ceiling package looks sure to pass through the Senate, the time scale over which they will be able to do so is in question. A partial government shutdown to avoid default is therefore not entirely off of the table yet. Overall, these elements appear as peripheral risks to an otherwise convincing argument for the expectation of a weaker US Dollar as we move into June. 

Discussion and Analysis by Charles Porter

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