US Dollar: Stronger as Fed hike path extends – MUFG

MUFG’s Lee Hardman notes the US Dollar is holding a stronger tone after the Federal Reserve began tightening policy, lifting the Dollar Index back above 100.00. Support comes from a sharp rise in US yields, with markets now pricing three more Fed hikes over the next year. Hawkish remarks from regional Fed presidents reinforce expectations for an extended rate hike cycle.

Dollar supported by rising US yields

"It has been a quiet start to the week in the FX market with the US dollar continuing to trade on a stronger footing after the Fed’s decision last week to begin tightening monetary policy. It has helped to lift the dollar index back above the 100.00-level for the first time since the start of August. The next important resistance level is provided by the year-date-high from 24th June at 101.80."

"The US dollar is deriving support from the sharp ongoing adjustment higher in US yields. The 2-year US Treasury bond yield has already increased by around 55bps since late last month as market participants have moved to price in a more extended Fed rate hike cycle. The US rate market is expecting the Fed to deliver three more hikes in the year ahead. Those expectations were supported by hawkish comments yesterday from regional Fed presidents although neither are voting members this year."

"Chicago Fed President Goolsbee, who will become a voting member again from next year, warned that “supply shocks have come more frequently, hit harder and lasted longer…and once supply shocks to inflation become persistent, some of the logic behind ‘looking through’ no longer holds”."

"At the same time, St Louis Fed President Musalem told Reuters that “both persistent and recurring supply forces are continuing to contribute to keeping inflation risks elevated, and I judge that without further policy restraint on inflation it is more likely to be substantially above our 2% target in 18 months than at target”."

"He believes that “it’s crucial that policy puts a meaningful restraint on inflation”, and that “earlier and incremental policy firming is better and less disruptive than later and larger and potentially more abrupt policy action”. He judges that the current policy rate is still on the “accommodative side”."

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