Dollar Holds onto Gains as Hawkish Fed Dominates Market
The US dollar is holding onto gains following Kevin Warsh's hawkish speech last week, and energy prices are adding to the trend of a stronger dollar. The renewed spike in energy prices is seen as dollar-supportive, while the dovish hike from the Reserve Bank of New Zealand earlier in the week has had little impact on the market.
The long end of bond markets remains a focus point for traders, with concerns over fiscal consolidation and potential Treasury Secretary Scott Bessent's support for the bond market. However, the new baseline is that the Fed will hike rates in September, despite weak labour market data. The upcoming release of the Fed's Beige Book and a moderated discussion with Fed's Christopher Waller are expected to reinforce this trend.
The cyclical Fed story is seen as more significant than the dollar bearish debasement theme, leading to a potential advance in the dollar against low-yielding currencies, particularly the Swiss franc. The yield curve steepening from the long end could drag the dollar lower if it continues to sell off, but the hawkish Fed is expected to take precedence.