Policy uncertainty and surprises keep FX markets volatile, but the US dollar (USD) has stabilized at a lower level, writes Bernhard Eschweiler, senior economist at Zug-headquartered QCAM Currency Asset Management.
“The impact of US policy shocks is negative but less than feared. In particular, the risk of a recession in the US has declined significantly. The damage to US policy credibility has not been undone, but the nearterm outlook for the USD appears more balanced,” he wrote. “We believe that the outlook is less negative than feared a little while ago and that the USD is likely to stay range bound over the next few months.”
However, that does not mean that the challenges that face the USD are removed. US exceptionalism remains under threat from Trump’s policy agenda. Still, Eschweiler noted that “the dominance of the USD in international goods, services and financial markets is deeply entrenched and there is no other currency that is likely to take its place quickly if at all. In particular, there is no other financial market that comes close to the US in terms of size, liquidity, innovation and return potential.”
On Japan, QCAM sees the central bank taking a pause but expect a return to policy normalization towards year end. The data continues to show economic growth and inflation resilience. Especially wages are accelerating.
“We also expect the JPY to gradually regain its safe-haven status, which helps in times of increased policy uncertainty. A risk is the ongoing trade conflict with the US, but Japan is less vulnerable due to offshoring and we think Trump needs Japan more as a partner versus China,” according to QCAM’s report.