Recent Banking Turmoil Has Weakened the US Dollar

The Federal Reserve moved aggressively to contain the crisis in the US, which appears to have contributed to a weaker dollar. Investors have also revised their rate hike expectations for major central banks. The US has seen some of the biggest interest rate moves, narrowing spreads with several countries and sending the greenback lower against a number of other currencies. If we see any more episodes of financial stress in the coming months, volatility could remain high in the financial and currency markets. For now, our baseline scenario doesn’t foresee financial stress getting much worse, but we do see growth continuing to slow and a number of countries possibly dipping into a moderate recession. If things play out this way, the US dollar should come out on top by virtue of its safe haven status. Meanwhile the Canadian dollar could fall below US$0.72 this year.