Upside for the dollar to emerge once credit spreads widen

The US dollar is waiting for a signal from the credit market. Once spreads start to widen, the dollar can make a decent comeback.

to a more than three-week low after CPI data, as it heads towards its April low. At the same time, US high yield corporate bond spreads, which tend to move in tandem with the dollar, still look relatively low by historical standards, in the face of a potential recession.

There is a case for credit spreads to be wider as the Fed’s SLOOS showed that credit conditions tightened further in Q1 and as the Treasury yield curve, perceived by some as a recession indicator, remains inverted.

While the dollar fell after CPI showed some signs of slowing inflation, the data is not enough to move the needle. While price pressures are improving, inflation still remains elevated and well above the Fed’s 2% inflation goal.