Barclays_FX_Insights_Disinflation_spillovers_from_the_dollar_s_decline

This document is intended for institutional investors and is not subject to all of theindependence and disclosure standards applicable to debt research reports prepared for retailinvestors under U.S. FINRA Rule 2242. Barclays trades the securities covered in this report for itsown account and on a discretionary basis on behalf of certain clients. Such trading interestsmay be contrary to the recommendations offered in this report.Please see analyst certifications and important disclosures beginning on page 7.FX InsightsDisinflation spillovers from thedollar's declineAs the Fed faces inflationary pressures, disinflation isbecoming a solid baseline for the rest of the world. Thisimplies central bank divergence that should weigh onexpensive currencies like the euro and boost front-end ratesin Asia.Inflation divergence and its repercussions• A combination of tariffs, resilient hard data, declining immigration and a weaker dollar feedsinto our expectation that US inflation will rise. In contrast, the RoW has not imposedretaliatory tariffs and is faced with the disinflationary effects of currency strength, weakeningglobal demand, lower oil prices and excess supply from China.• We go through each inflation driver in turn below and conclude that Europe and Asia are mostat risk of lower than expected inflation.• This implies dovish risks and favours receiving positions in rates for Asian central banks, suchas Malaysia and Korea, where inflation is already low and not much easing is priced. TheECB's stance shifted more hawkish in July, but there are limits to the euro's strength in light ofthe deterioration in the region's international competitiveness.US tariffs are a disinflationary demand shock for theworldThe flip side of the substantial dollar decline in H1 25 is a boost to practically all the currencieswe cover (Figure 1). These sharp currency moves add to the case that as the Fed likely facesinflationary pressures, disinflation is becoming a solid baseline for the rest of the world. Thisimplies central bank divergence that should weigh on expensive currencies like the euro andargues for receiving rates in Asian economies that were already struggling with low inflation.FICC ResearchFX Strategy28 July 2025SIGNATURESkylar Montgomery Koning+1 212 526 8034skylar.montgomerykoning@barclays.comBCI, USLefteris Farmakis+44 (0) 20 3555 6549lefteris.farmakis@barclays.comBarclays, UKThemistoklis Fiotakis+44 (0) 20 7773 2002themos.fiotakis@barclays.comBarclays, UKCompleted: 25-Jul-25, 17:05 GMTReleased: 28-Jul-25, 10:00 GMTRestricted - ExternalFIGURE 1. The dollar declined broadly in the first half of 202516% 15% 14% 13% 13% 13% 12% 11% 10% 10% 9% 9% 8% 8% 8% 7% 7% 6% 6% 6% 6% 6% 5%3% 2%0%0% -1%-11%-13%-15%-10%-5%0%5%10%15%20%HUF SEK CZK PLN CHF EUR NOK RON TWD GBP MXN JPY NZD KRW ILS CLP SGD COP MYR AUD CAD ZAR THB PHP CNY INR IDR HKD DXY TRYNote: Crosses are XXXUSD and the dollar is DXY. Source: Bloomberg, Barclays ResearchThe US tariffs are a price level shock