US Dollar: Strength builds on yields – ING

ING’s Francesco Pesole notes that the Dollar is benefiting as global bond yields and Oil prices rise, with the USD re-establishing a positive correlation with long-end US yields. He argues that only a marginal upside surprise in US CPI may be enough to fully price a September Fed hike, and sees DXY 100.0 increasingly as a realistic destination in coming weeks.

Rebuilding correlation with long-end yields

"The dollar is tentatively re-establishing a positive correlation with long-end yields, helped by a smaller-than-expected $6bn Treasury buyback announcement, which ultimately translated into an even smaller $5.19bn operation yesterday. US Treasury Secretary Scott Bessent's reluctance to pick a fight with the bond market through oversized intervention remains a necessary condition for that positive USD-back-end rates correlation to regain its footing."

"Pricing for next week's FOMC inched up to 18bp yesterday, buoyed by the oil rally and a modest upward revision to July PPI, while August figures came in exactly on consensus. Today's August CPI release can provide the green light to fully price a September hike with even a marginal upside surprise."

"The picture becomes more nuanced in the event of a downside surprise. Federal Reserve Chair Kevin Warsh set a high bar for incoming data to overturn the hawkish narrative, but Christopher Waller later suggested no hike would be needed if inflation continued to improve through August."

"Oil may prove the deciding factor, having rallied around 15% since then. A softer CPI print could weigh on the dollar, but may not be enough to push September hike pricing below 50%, a level we suspect would be sufficient to bring any unconvinced FOMC members on board."

"We continue to see upside potential for the dollar. The yen rally has stalled and is no longer exerting a negative spillover effect on USD. Developments in the Gulf leave the balance of risks skewed towards higher oil prices, while stress in bond markets is increasingly bleeding into risk assets."

"That combination should favour a defensive rotation back into the dollar. DXY 100.0 is starting to look less like a stretch target and more like a destination."

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