Barclays: US Dollar’s Rally Likely Nearing Its Peak

The dollar is likely to head higher in the coming months before weakening in the second half of the year as the outperformance of the US economy fades and investors’ risk appetite improves, according to Barclays Plc.

While tighter monetary policy, a resilient US economy and demand for havens due to the Russian war in Ukraine should support the dollar in the short term, that may reverse as global growth improves.

Overvaluation of the dollar, crowded positioning and a “stretched” current-account deficit should also weigh on the US currency in the second half of this year.

This view comes amid broad discussions about threats to the US dollar’s dominance and how other countries like China are looking to expand their currencies.

Early on Tuesday, the US Dollar was boosted by surprisingly hawkish comments by Federal Reserve Chair Jerome Powell that lifted Treasury yields across the curve. The US 10-year note is 18 basis-points (bp) from where it closed on Friday

The rising interest rate environment undermined the yield sensitive Japanese Yen with USD/JPY making a 6-year high. The market is now pricing in around seven rate hikes of 25 bp in the six meetings left in 2022, implying a 50 bp move at some point.

Japan’s Nikkei 225 index is up around 1.4% in Asia due to a weakening Yen boosting the export-centric bourse. Australia, Hong Kong and South Korean indices were all in the green but to a lesser extent. China mainland indices went lower despite more re-assurances of support from government authorities.

Crude oil continued its march higher with WTI above US$ 114 bbl and the Brent crude futures contract over US$118. Gold is little-changed near US$ 1,937 an ounce and wheat prices have led soft commodities higher.

Looking at the currency matrix, the US Dollar is the best performer and joined higher by AUD, CAD and NZD. The Japanese Yen was a stand-out underperformer with GBP and NOK lower to a lesser degree.