Dollar Stays Firm Amid Elevated Hike Odds

The US Dollar has regained most of its recent losses and is expected to remain strong due to high odds of a rate hike in September. According to Brown Brothers Harriman's (BBH) Elias Haddad, Fed funds futures price a 67% chance of a 25 basis point rate hike on September 16 and imply 60 basis points of tightening over the next twelve months.

The upcoming ISM manufacturing index, JOLTS print, and August CPI are seen as key tests for the US economy. The ISM manufacturing index is expected to show resilient manufacturing activity, but with a falling Prices Paid index signaling diminishing upside inflation risk.

While some may argue that rising Treasury yields reflect concerns over US fiscal policy, BBH's analysis suggests that the outperformance of US 10-year Treasuries relative to other major bond markets does not necessarily indicate mounting concerns. However, rising interest expense will ultimately push up the US Treasury term premium, making the Dollar more vulnerable to periods of fiscal stress.