US Dollar: Limited upside as fiscal plans questioned – MUFG

MUFG’s Derek Halpenny notes that the US Dollar has weakened as investors focus on potential US Treasury measures to stem the decline in Treasury yields, while Japanese inflation data supports expectations for a 25bp BoJ rate hike in September. He remains sceptical that the US will deliver credible fiscal consolidation and sees limited scope for further EUR/USD upside in the near term.

Dollar pressured by fiscal doubts

"The US dollar has weakened further today after stabilising yesterday with investors focused on potential further action by the US Treasury to stem the decline in UST bond yields."

"Yields are broadly unchanged today although JGB yields have jumped following the release of nationwide CPI data for July which revealed a rebound back toward the 2.0% level. The core-core CPI rate jumped to 1.9% with underlying inflation lifted by certain foods and dining out."

"The data backs up current market pricing, and our view, that the BoJ will hike rates by 25bps at the next policy meeting in September."

"The US now looks to be signalling it is heading in the opposite direction after Scott Bessent stated that the Treasury would announce today or early next week “an increased focus on fiscal consolidation”."

"Obviously, we, like many market participants, are very sceptical of the US announcing anything of any significance that would lead to credible fiscal consolidation."

“A US fiscal initiative that lacks credibility won’t help UST bonds or the dollar but the appetite to sell the dollar remains contained by Middle East risks. For Europe that is evident through the steady rise in natural gas prices.”

"It’s difficult to envisage in these circumstances much further upside for EUR/USD over the short-term."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)