Dollar comeback case 'a decent one' – September Fed hike 'back in play'

The dollar was left nursing heavy losses against most of its major peers after last month’s Treasury buyback wobble.

Notwithstanding this, we think that the case for a near-term bounce in the greenback is a decent one. Warsh's hawkish pivot at Jackson Hole, followed by what was a blowout US payrolls report for August, has put a September rate hike from the Fed back in play.

We think that next week’s FOMC meeting is genuinely one of the toughest to call for a while, with markets torn as to whether we’ll get a hike. This is a highly unusual state of uncertainty this close to a decision date - welcome to Kevin Warsh’s guidance-averse Fed.

We note that Warsh’s reluctance to lean on data means that nothing is guaranteed, even in the event of a hot inflation report this week. As we see it, the strongest case for a hike does not necessarily lie in the data, but with the Fed’s credibility.

President Trump’s extraordinary outburst on Truth Social last week  - where he threatened to cut ties with trading partners unless the Fed lowers rates - has further raised fears over a loss of Fed independence, concerns that would only amplify should the FOMC stand pat next week.

Clearly, if the Fed does indeed raise rates this month, with futures only discounting 15bps of hikes for the meeting, there’s room for more upside in the USD.