LIVE MARKETS-Déjà vu all over again for the U.S. dollar

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DÉJÀ VU ALL OVER AGAIN FOR THE U.S. DOLLAR

Since Donald Trump's re-election in 2024, the dollar has followed remarkably similar price action to that of his first term, as seen in the chart below from Scotiabank's FX strategists.

It's not exactly clear why it's been so strikingly similar. Back in the 2016-18 period, the Fed was tightening policy. This time around they are easing, albeit at a gradual pace.

But there are also similarities. "Tariffs, trade and geo-political tensions are an obvious feature of both episodes," Scotiabank's Shaun Osborne and Eric Theoret write. Looking forward, they believe that risks remain tilted to more losses for the dollar in the medium term due to easier Fed policy, reduced U.S. growth advantage and investors rebalancing overweight USD portfolios. Seasonal patterns are also more USD-negative into spring, Scotia writes. But that doesn't follow the pattern of 2016-18 where the dollar recovered some lost ground heading into summer.So, what could keep that pattern alive?

"We will be sensitive to shifting expectations regarding the Fed policy outlook; growth is firm and inflation remains sticky which may dampen expectations for H2 Fed cuts," Scotia says. "Heightened market volatility could revive the USD’s haven credentials. Weaker growth in Europe or Asia may also lift the USD."

(Samuel Indyk)

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