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The USD index has risen by 2.3% this quarter. We are maintaining our neutral stance on the US dollar. While the dollar is expensive by more than 20% according to purchasing power parity (PPP), positive momentum continues to be too strong to take an outright bearish position. We will consider downgrading the dollar to underweight only when momentum starts to weaken and when there is clear evidence that the Fed will have to back off from its tightening path.

USD has tactically benefited from 4 sources

Safe haven demand from the Russian –Ukraine conflict

A still relatively resilient outlook for Fed rates as compared to the ECB and some other CBs

Signs of USD funding stress precipitated by Western sanctions on the Russian financial system

Flows out of Europe into USD as euro area prices in the growth and ToT shock from the conflict. But barring that, upside momentum in DXY may fade by 2nd half of Q2 on slowing safe haven demand should the geopolitical temperature drop.

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