Dollar Strength Builds on Yields, September Hike Pricing Rises
ING's Francesco Pesole notes that the US Dollar is gaining strength due to rising global bond yields and oil prices. The USD is re-establishing a positive correlation with long-end US yields, which is helping its upward momentum.
The small $6 billion Treasury buyback announcement has contributed to this trend, as it resulted in an even smaller $5.19 billion operation yesterday. This suggests that the US Treasury Secretary Scott Bessent's reluctance to intervene in the bond market is a necessary condition for the positive USD-back-end rates correlation to regain its footing.
Pricing for next week's FOMC meeting has increased to 18 basis points, driven by the oil rally and a modest upward revision to July PPI. A marginal upside surprise in August CPI could fully price a September Fed hike.
However, if inflation data shows a downside surprise, the picture becomes more nuanced. Federal Reserve Chair Kevin Warsh set a high bar for incoming data to overturn the hawkish narrative, but Christopher Waller later suggested that no hike would be needed if inflation continued to improve through August.
The oil price rally, which has risen around 15% since then, may prove decisive in the event of a softer CPI print. A softer CPI could weigh on the dollar, but may not be enough to push September hike pricing below 50%, a level that would likely bring any unconvinced FOMC members on board.
ING continues to see upside potential for the dollar due to developments in the Gulf and stress in bond markets. The yen rally has stalled, and its negative spillover effect on USD is no longer present. This combination should favor a defensive rotation back into the dollar, making DXY 100.0 increasingly realistic.