US dollar prospects are turning more favourable – MUFG

The dollar continues to benefit from safe-haven flows on the last trading day of the week. Economists at MUFG Bank expect the greenback to stay on a solid footing.

Mixed data, further curve inversion and asset price declines

“Add to that the flow of data this week that indicates a slowing economy there are reasons for the Fed to stick to the current pace of tightening. Retail sales for August revealed no growth in Control Group sales while the July data was revised sharply lower. Manufacturing slowed markedly in August as well and manufacturing sentiment for New York and Philadelphia remained negative. We have not had housing data this week but the housing market is weakening sharply.”

“With the Fed set to hike by possibly another 175 bps before year-end, we would expect financial conditions to remain unfavourable for assets generally and it clearly points to the US dollar being the primary beneficiary.” 

“For 2s10s to break to new levels of inversion (beyond the Aug low of -58 bps) would take us to levels last seen in the early 1980’s. That would certainly likely mean a broadening of the strength of the US dollar.”