US Dollar Rallies as Warsh's Credibility Boosts Fed Policy
US Dollar gains strength after Fed Chair Warsh's Jackson Hole speech, where he reassured markets that inflation remains too high and reaffirmed the Fed's commitment to achieving its 2% PCE inflation target.
The USD has strengthened, gold prices have fallen, and the US yield curve has flattened since Warsh's speech. Despite recent improvements in inflation data, Warsh emphasized that short-term interest rates remain the Fed's primary policy tool for fulfilling its dual mandate.
OCBC FX Strategist Sim Moh Siong notes that structural worries about Fed credibility have diminished, shifting focus back to US cyclical data ahead of the September FOMC meeting. Markets now price around 15bp of tightening for the September FOMC meeting, up from just 8bp before Warsh's speech.
While OCBC still expects no hike at the next FOMC meeting, a resilient labour market and sticky inflation should maintain a hawkish policy bias and keep the USD supported. Asian FX may start the week on a softer footing due to the firmer USD.