With the Fed likely to indicate that any rate cuts are a relatively distant prospect in light of data which continues to suggest the US economy isn’t cooling consistent with efforts to badger underlying inflation back to target, it’s worth noting that the dollar sat at a YTD high headed into the May FOMC statement refresh.

About a month ago, I declared the “return of the wrecking ball,” when the juxtaposition between a third successive US CPI overshoot and imminent confirmation from Christine Lagarde that the ECB’s on track to begin dialing back rates, underscored the policy divergence narrative, pushing the greenback towards its largest one-day gain since Jerome Powell’s hawkish congressional testimony on the eve of SVB’s collapse.

Fast forward to May and notwithstanding a below-consensus advance read on Q1 US GDP (which, as noted here on several occasions, was a bit of a false optic given sturdy reads on spending and investment), the world’s largest economy continues to steam along. And the data continues to argue vociferously against Fed cuts. An overshoot on a key gauge of US employment costs was the nail in the coffin for anyone still holding out hope for Fed easing before, say, September.

“The relentless stream of above-consensus US inflation data continues. Yesterday it was the Employment Cost Index,” ING’s Chris Turner wrote, a few hours ahead of the Fed on Wednesday. “Higher US rates have sent one measure of the dollar to the year’s high [and] the prospect of a hawkish Fed and potentially an equity selloff [may] keep the dollar bid.”

The DXY’s up 5% in 2024, and came into May riding a four-month streak of gains.

That’s the longest run since September 2022, when inexorable dollar strength wreaked havoc for the euro, sterling, the yuan and yen.

The 2022 episode forced Japan to intervene for the first time in decades. A year and a half later, Japanese officials were compelled to step in again when USDJPY breached 160, a level unseen in nearly 35 years.

Although the BoJ delivered a landmark rate hike in March, there was no hawkish follow-through at the bank’s April gathering. Considered against a Fed that’s seen pushing out rate cuts, the read-through for the yen was clear enough.

The BoJ probably spent JPY5.5 trillion on the intervention illustrated above.

Recall that Janet Yellen Yellen gave Japan a green light for limited intervention when she endorsed a joint statement with Japanese Finance Minister Shunichi Suzuki and South Korean Finance Minister Choi Sang-mok at last month’s IMF-World Bank gatherings in Washington. The two officials highlighted “serious” currency concerns in Tokyo and Seoul. Yellen was sympathetic.

As a reminder, unilateral interventions aren’t generally effective when it comes to offsetting fundamental FX drivers. And the policy divergence between the Fed and its counterparts around the world is as consequential as fundamental drivers get.

The only hope for countries struggling against dollar strength (absent a moderation in the US data) is that the bar for Powell and co. to catalyze incremental hawkish re-pricings at the US front-end is now very high with all but one 2024 rate cut pretty much priced out.

“Whether the US economy is in a reflationary or a stagflationary phase makes a big difference for some assets, but in the FX market at the moment the only thing that matters is where rates are heading,” SocGen’s Kit Juckes said Wednesday. “All we can say on that front is that we have re-priced sufficiently that Mr. Powell will need to sound pretty hawkish for upward momentum in rate re-pricing and the dollar to be sustained.”

In the same note cited above, ING’s Turner summed up the US macro zeitgeist behind it all. “The late 2023 disinflation story feels like a dream,” he wrote.