US Dollar Recovers on Hawkish Fed Signals, But Longer-Term Risks Remain

DBS Group Research economist Philip Wee notes that the US Dollar (USD) regained its footing after Fed Chairman Kevin Warsh's Jackson Hole speech. The futures market reinstated a significant probability of a September FOMC rate hike, with odds at 58%. Markets focused on Warsh's conditional comment that the Fed still has 'work to do' if underlying inflation does not move towards 2% 'clearly and with sufficient speed.'

Warsh reaffirmed his inflation-first stance, but avoided providing detailed forward guidance. This lack of clarity leaves structural long-bond and de-dollarisation risks for the USD unresolved in the longer term.

The Treasury's plans to double its long-end buyback operations from $2 billion to $4 billion per operation, effective September 9, has raised concerns about the overlap between monetary and Treasury debt management. The 'Bessent Put' refers to this plan, which could create an awkward gap in the market.

For now, the USD benefits from hawkish Fed signals and the cushioning effect of the 'Bessent Put.' However, its longer-term structural risks remain intact.