• The US dollar rallied 2% against the euro and 3% versus the Japanese yen in the past two weeks on expectations that the Fed would pause in its easing cycle. With financial markets showing signs of stabilizing and many US data surprising to the upside, investors have become more optimistic about the credit market and US economic outlook. Hawkish Fed rhetoric against a background of escalating oil and food prices also helped underpin dollar sentiment. Market is pricing in a Fed pause to let past rate cuts to work through the economy before considering further actions.
  
  
• In contrast, recent economic reports out of the euro zone and the UK have been rather disappointing. They indicate that the European economies are not immune to a US economic slowdown. While both the Bank of England and the European Central Bank left rates unchanged at their latest meeting on May 8, market expects the former to cut again as soon as June and the latter in the second half of the year.
  
  
• Amid the broad dollar strength, the Canadian dollar was able to maintain a strong tone as the Canadian unit was underpinned by crude oil prices hitting fresh records of above USD126 a barrel. Canada is a net exporter of oil.
  
  
• Looking ahead, while we are more cautious about the US economic outlook and see further cut in US rates, a pause is still likely at the June meeting. The ECB will be under increasing pressure to cut as more disappointing data emerge. As such, diverging rate outlook is likely to underpin dollar sentiment, providing more reasons for dollar bulls to bid up the US unit.
  

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