Dollar Gains on Weak Stocks, But Rate Hikes Loom

The US dollar has gained ground today due to weakness in stocks and a stronger-than-expected Chicago Fed national activity index. The index fell by -0.14 to -0.08, beating expectations of -0.09. This has boosted liquidity demand for the dollar.

Gains in the dollar are limited, however, as the Treasury's plan to use its General Account to fund expanded buybacks of higher-yielding government securities could increase demand for dollars and put upward pressure on prices. A decline in WTI crude oil by over -1% has also lowered inflation expectations and is dovish for Fed policy.

The markets are discounting a 40% probability of a +25 bp rate hike at the next FOMC meeting on September 15-16, while the ECB's chances of a +25 bp rate hike at its next meeting on September 10 stand at 96%. The yen has underlying support from increased expectations of a BOJ rate hike in either September or October.