USD: Evidence and speculation weighs on the USD – ING

The dollar is drifting a little lower against major currencies and remains tarnished by April's events. US Treasuries continue to trade on a soft footing, and whether judged against the risk-free SOFR swap rate or German bunds, they have failed to reverse much of the spread widening seen in April. Notably, the correlation between USD/JPY and US Treasury yields – which in normal times is a strong positive – now remains negative, ING’s FX analyst Chris Turner notes.

100.20/25 is short-term support for DXY

"The topic of de-dolarisation involves a lot of speculation about what might happen, but the evidence is also starting to support the diversification thesis. Earlier this week, we saw data from the Japanese Ministry of Finance for portfolio flows in April. The US and the eurozone will not release similar data until mid-June. The Japanese data showed that foreigners bought $25bn of Japanese equities and $31bn of Japanese long-term debt securities in April. That's the largest combined foreign monthly purchase of Japanese assets on record, going back to 2005."

"Today, the focus is on US April retail sales, which are expected to be flat after a strong bounce in March. We don't have a strong read on the risks to the data here, but we suspect the dollar is more vulnerable to a weaker number. We also have comments from Fed Chair Jay Powell at 1440CET today. If anything, the bounce back in long-term inflation expectations (to 2.5% from 2.3% when looking at the USD 5Y5Y inflation swap) should keep him even more neutral than he has already been. His commentary looks unlikely to move the needle on market expectations of just 50bp in Fed cuts this year."

"Barring a blockbuster retail sales figure – and even that could be discounted by way of pre-tariff front-loading effects – we see DXY staying soft. 100.20/25 is short-term support, below which DXY can give back more of its recovery over the last three weeks."