The dollar has quietly gone a little bid this week. We’re not sure what’s driving it, but we wouldn’t read too much into it at this stage. Perhaps it’s just that sitting short dollars is expensive with one-week dollar rates still well above 4.00%. There hasn’t really been that much progress on Ukraine this week, despite European leaders hailing a ‘breakthrough’. Let’s see whether any more details emerge about the level of support the US is prepared to offer Europe in defending Ukraine, and also whether President Putin is prepared to accept European boots on the ground in Ukraine – the threat of which (under NATO) prompted Russia to invade Ukraine in the first place. EUR/CHF is trading lower in a slightly disappointed fashion over progress on a ceasefire/peace, but CEE FX seems happy to hold onto gains.
In terms of the calendar today, we have prospective Fed Chair front-runner Christopher Waller speaking at 17CET, though the subject here is payments. More interesting will be the FOMC minutes released at 20CET, which will air more of the views of the two dissenters (Waller and Bowman) who voted for a rate cut in July. Market moves, however, may be limited given that the July jobs report was released a few days later. A much better read on the Fed situation should emerge on Friday afternoon during Chair Powell’s speech at Jackson Hole. In all, we don’t see the need for big DXY moves today and struggle to see it breaking above 98.50/60 resistance.
Where there have been big moves, however, is in New Zealand. While delivering the much-anticipated 25bp cut to 3.00%, the RBNZ seriously debated a 50bp cut – for which two of the six committee members voted. NZD/USD fell 1.1% and the terminal rate for the easing cycle was marked some 20bp lower, close to 2.50%. Despite acknowledging that CPI would increase to and possibly breach the top of its 1-3% target range in the next quarter, the RBNZ felt that the spare capacity, both in labour and business, meant that inflation wouldn’t stick and would be lower next year. The backdrop is that the New Zealand unemployment rate has risen to 5.2% from 3.2% over the last three years. The RBNZ also felt that US tariff uncertainty might be reducing the effectiveness of rate cuts, where uncertainty continues to depress business investment.
We mention all this because of the battles being faced by both the Fed and the Bank of England in terms of how to react to higher short-term inflation. Certainly, neither has the same spare capacity in labour markets as New Zealand does. But the reaction in NZD FX and rates markets today serves as a reminder that if the labour market shows serious signs of softening, doors open for central banks to cut rates back to neutral or even below neutral. That’s why we’re bearish on the dollar and, to a lesser degree, sterling in 2026.
Chris Turner