Dollar Strengthens on Rising Yields and Oil Prices
The US dollar is gaining strength due to rising global bond yields and oil prices. According to ING's Francesco Pesole, the dollar is re-establishing a positive correlation with long-end US yields. This trend is being driven by smaller-than-expected Treasury buyback announcements, which have resulted in an even smaller $5.19 billion operation.
Pesole notes that only a marginal upside surprise in next week's US Consumer Price Index (CPI) may be enough to fully price a September Federal Reserve hike. The current pricing for the FOMC meeting is at 18 basis points, with oil prices and a modest upward revision to July PPI contributing to this increase.
A softer CPI print could weigh on the dollar, but it may not be enough to push September hike pricing below 50%. Federal Reserve Chair Kevin Warsh has set a high bar for incoming data to overturn the hawkish narrative, while Christopher Waller suggests that no hike would be needed if inflation continues to improve through August.
The combination of rising oil prices and stress in bond markets is expected to favour a defensive rotation back into the dollar. ING believes that DXY 100.0 is becoming increasingly realistic as a destination for the dollar in coming weeks.