US Dollar: Near-term support with higher rate volatility – MUFG

MUFG’s Michael Wan notes the US Dollar strengthened as lower Eurozone CPI, comments from Kevin Warsh, and anticipation of US Non-Farm Payrolls supported the currency. He highlights Warsh’s push to change Federal Reserve communication, potential increases in US rate volatility, and a bias for the Dollar to stay supported in the very near term pending clearer US macro data.

Dollar supported as Fed shifts loom

"Overall the US Dollar was stronger with the combination of lower than expected CPI in Europe, mixed comments from Kevin Warsh, and ahead of non-farm payrolls numbers out later today."

"For the Fed, we saw a range of comments from Warsh in the Sintra Forum which partly reiterated what was mentioned during his first FOMC meeting, with a commitment to achieving price stability coupled with a desire to change the Fed’s communication strategy to focus less on forward guidance and spoon-feed the market less."

"Nonetheless, he also mentioned that the Fed should not fear strong productivity-led growth, and that it would be a mistake to raise rates during an AI-led productivity boom because that boom would allow the supply of goods and services to catch up with demand and keeping inflation in check even with a stronger economy."

"FX may as such also follow through with greater US rates volatility, with the bias towards the Dollar being supported in the very near-term until we get better clarity on the macro data and dynamics in the US."

"From a markets perspective, our bias is to think that rates will become more volatile moving forward and that the yield curve may become steeper, or at the very least the back-end of the US curve may not have space to fall much given his desire to reduce the size of the Fed’s balance sheet over time."

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