The U.S. Dollar (USD) experienced a pause in its recent rally, triggered by weak PMI data from Europe and the U.S., which has led to adjusted expectations regarding future policy rates by the Federal Reserve and the European Central Bank. Despite the near-term vulnerabilities, Credit Agricole argues that the USD remains a strong investment opportunity for several key reasons:

1. Rates Pause and PMIs:

   • Weak PMIs from Europe and the U.S. have led rates markets to price in a more extended pause in interest rate hikes by both the Fed and the ECB. Additionally, in the case of the Bank of England, expected terminal rates have been revised downwards by around 25 basis points.

2. Jackson Hole Symposium:

   • As central bank officials are expected to reiterate their commitment to maintaining elevated policy rates in order to control inflation, the USD should remain a buy on dips leading up to this event.

3. Questioning the 'Global Soft Landing':

   • The narrative of a 'global soft landing' has been underpinning risk sentiment. As this narrative begins to show signs of strain, increased risk aversion could lead to more buying pressure on the USD as a safe haven.

4. The 'USD Smile':

   • In a scenario where hawkish surprises emerge from the Jackson Hole Symposium, Credit Agricole suggests that the 'USD smile' could become the dominant FX market template. The term refers to the USD's dual role as a high-yielding, safe-haven currency benefiting from higher U.S. rates and yields while also gaining from spikes in risk aversion.

Conclusion: Although the USD may face short-term headwinds due to weak PMI data and a possible rate pause, Credit Agricole argues that it remains a "buy on dips," especially in the lead-up to the Jackson Hole Symposium. Hawkish policy signals from central banks could act as significant catalysts for the USD, making it a desirable asset amid potential market uncertainties.