USD: Pre-FOMC demand builds – BNY

BNY’s Bob Savage notes the US Dollar (USD) is entering the Federal Open Market Committee (FOMC) meeting with strengthening demand, including a first five-day net purchase streak in three months and rising use of USD cash and short-term instruments. He highlights April’s risk-on tone, but argues Federal Reserve (Fed) caution and global supply pressures limit Dollar downside, while potential policy errors from foreign hikes also support USD resilience.

USD demand firms into FOMC

"The dollar is heading into the FOMC decision on a good footing, having just registered its first five-day net purchase streak over the past three months."

"Using USD cash and short-term instruments (CAST) as an alternative proxy for USD demand, we also observe an acceleration in demand as the Fed decision approaches."

"Flows have been more mixed since March, but we highlight that there will be a lot of USD CAST on the sidelines that could be rotated back into underlying assets."

"We do not see a material change in the decision itself, and the Fed will view the dollar as a major factor in current policy; given the inflation risk in place, however, it may be preferable to limit downside risk with a dovish lean amid the current global supply pressures."

"Conversely, hikes elsewhere could be policy error, and this is also limiting downside risk to the dollar from rate differentials alone."