After sinking to a record low of $1.60 against the Euro in April, the Dollar has rallied to a 3-month high. According to analysts, the interest rate story appears to have driven the sudden reversal. In short, expectations surrounding the EU-US interest rate differential are changing, such that investors now believe the ECB will begin lowering rates just as the Fed begins hiking them. This story is also consistent with the broader economic picture, whereby the Fed is shifting its attention from the economy to inflation, while the ECB is doing the opposite. Meanwhile, the Treasury yield curve has gradually expanded in order to reflect expectations for higher medium-term interest rates. It doesn’t look like the Dollar will be a funding currency for carry trades for much longer. Thomson Financial reports:

John Noonan, a senior foreign exchange analyst at Thomson IFR, said the hawkish turn in Fed expectations is coinciding with a growing view that the euro zone economy will suffer more from the U.S. economic fallout than previously thought.

Read More: Dollar near 3-month highs vs euro on U.S. GDP revision