US Dollar: Short-term downside risks – ING

ING’s Chris Turner notes that dovish comments from Federal Reserve official Christopher Waller have pushed US yields and the Dollar lower, while supporting equities and high-yielding FX. He highlights that markets now price a 50% chance of a September Fed hike and see limited impact from US jobs data. Turner expects DXY to face resistance and the Dollar to drift slightly lower near term.

Dollar softens on dovish Fed tone

"Some surprisingly dovish remarks from the Fed's Christopher Waller yesterday sent US yields and the dollar lower, while at the same time sending equities higher. Neither the prospect of a Fed hike nor the surge in the yen has been enough to dent demand for high-yielding FX."

"Yesterday's speech from the Federal Reserve's Chris Waller was a little more dovish than most were expecting. Rather than reinforcing Chair Kevin Warsh's hawkish speech from a week ago, Waller's remarks shifted the burden of proof towards the need for a hot August inflation print to justify a rate hike – otherwise he would vote for a hold."

"High yield and procyclical FX remain in demand for the time being. Given the hot debate over whether the Fed raises rates at all, it looks like investors are concluding that any Fed tightening cycle will be very modest and not enough to derail a relatively benign investment backdrop."

"That presents a mildly negative backdrop for the dollar in the short term. And barring a very strong NFP number today, which would firm up a September rate hike, we could see the dollar drifting a little lower."

"99.15/20 could cap DXY intraday strength, with risk to 98.60 on soft payrolls. On a more multi-day view and given our new house call for a 25bp Fed hike, we tend to see the dollar as relatively stable into year-end now."

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