US Dollar (USD) recovered to a seven-day high, outperforming mostly against Japanese Yen (JPY). We are sticking to our view that relative monetary policy remains a drag for USD. The Fed has room to deliver more rate cuts while most other major central banks are done easing. No policy-relevant US data due today, BBH FX analysts report.

Fed retains room for rate cuts as other central banks pause

"US inflation unexpectedly cooled in November, but the data may have been distorted by the government shutdown. For a few price indexes, the Bureau of Labor Statistics used non-survey data sources instead of survey data to make the index calculations. Importantly, upside risk to US inflation appears to have softened and supports Fed funds futures pricing 50bps of cuts next year."

"The October US TIC data indicates a modest slowdown in foreign demand for US long-term securities (treasury bonds & notes, corporate bonds, equities, gov’t agency bonds). Net foreign purchases of long-term US securities increased $39bn in October vs. $203bn in September driven by private foreign investors net selling of Treasuries and reduced exposure to US equities."

"We expect foreign appetite for US long-term securities to dwindle over time. The Trump administration’s effort to narrow the US trade deficit means fewer dollars will flow overseas, reducing the need for those funds to be recycled back into US securities. That is a structural drag on USD."