The US dollar recovered some of the lost ground recorded over the previous week on Tuesday as risk turned less favourable. Economists at MUFG Bank note that the USD sell-off may run out of steam over the short-term.

Fed may need to keep talking tougher for longer

“While the US economy is slowing, and we believe is set to slow further, a sharp slowdown into some period of recession may not be imminent.”

“The near 10% rally in the US equity markets from the low-point on 20th May will probably not be that welcomed by central bankers who need to orchestrate tighter financial conditions as a means of influencing inflation expectations. It suggests the Fed may need to keep talking tougher for longer.” 

“With more work to be done by the Fed on slowing the economy, it seems more likely that this US dollar sell-off may run out of steam over the short-term.”