Dollar’s Rally Persists Amid Strong US Growth and Global Bond Selloff
The US dollar saw a broad rally last week, reaching new cyclical highs as measured by the DXY index. This rise came alongside widening interest rate differentials between the US and the Group of Six (G6) economies, coupled with a deepening global bond market selloff. The selloff was driven by tighter expected policy paths, increased bond issuance from large tech firms, and concerns over sovereign debt sustainability.
Friday’s softer-than-expected September nonfarm payrolls (NFP) data temporarily eased some upward pressure on the dollar by reducing the likelihood of an October Federal Reserve rate hike. However, the labor market report still indicated stability, which did not challenge the Fed’s overall tightening bias. Consequently, the brief relief rally in Treasury bonds was short-lived.
While tighter monetary policies in other regions and growing speculation of an October Fed pause pose some headwinds for the dollar, Brown Brothers Harriman (BBH) argues that stronger US economic growth and robust foreign demand for US securities continue to skew USD risks to the upside.
The upcoming release of the September Federal Open Market Committee (FOMC) minutes on Wednesday may appear somewhat dated, given recent calls for patience from key Fed officials such as John Williams, Christopher Waller, and Michelle Bowman. The September FOMC meeting had a hawkish tilt with unanimous support for a rate hike, which may not fully reflect the current sentiment.