Dollar Finds Bond Market Support Amid Trade Tensions and Sanctions Risks
The US Dollar has found support in the bond market, where long-dated yields have stabilized. According to Francesco Pesole of ING, this stability is helping to steady the dollar. However, other factors are complicating the outlook for the currency.
US-Canada trade tensions and Iran-related sanctions risks are among the concerns, while a renewed US-China trade spat could also hurt the dollar. In fact, Pesole notes that any serious revival of the trade issue would be negative for the dollar, mirroring last year's correlation with the issue.
In related news, CNBC reported yesterday that the Treasury may use its account at the Fed (TGA) to fund its buyback operations for long-dated debt. However, ING's rates colleagues argue that this would not be a significant development for the bond market, as buybacks funded through bill issuance today versus buybacks funded by running down the TGA and issuing bills later are largely equivalent.
The balance of risks for the dollar remains skewed to the downside, but Pesole sees further consolidation into the upcoming Jackson Hole event as the baseline scenario. This suggests that while there may be some short-term volatility, the dollar is likely to continue consolidating in the near term.