Our baseline view in FX markets is that the Dollar over the coming months will be entering a cyclical bear trend. This is premised on tighter US credit conditions adding to tighter monetary conditions and delivering the long-awaited US disinflation story. 

Should the Fed be in a position to cut rates sharply later this year, we are convinced that the dollar would trade lower. Under that scenario, we think EUR/USD should be somewhere in the 1.15+ area by year-end, while USD/JPY should be below 130.

A weaker USD should be a positive story for global growth. Many countries, especially emerging market countries, have had to support local currencies with higher rates. A turn in the broad Dollar trend should give them some breathing room and perhaps attract to emerging markets the kind of positive portfolio inflows not seen since late 2020.