US Dollar Weakens as Fed Credibility is Questioned

US Treasury bond market sell-off weighed on the US dollar after the Federal Reserve's decision to keep interest rates unchanged. The long-end of the US Treasury bond market sold off, steepening the Treasury curve and weakening the dollar.

MUFG's Derek Halpenny noted that Fed Chair Warsh's unclear justification for the decision added to the uncertainty surrounding the Federal Reserve's policy. Warsh spoke in detail for around 45 minutes but failed to provide a clear explanation for the FOMC's decision.

Halpenny offered three possible explanations for the unclear justification: a potential more laissez-faire approach from Warsh, which could increase risks of the Fed ending up behind the curve; Warsh's mention of assessing the degree of stimulus coming from the balance sheet, indicating a risk of a sooner adjustment in the size of the balance sheet; or Warsh being more ideologically opposed to rate hikes than previously assumed.

President Trump's comment that 'Warsh would love to see lower rates' during the press conference also added to concerns about political influence on the Fed. The 2s10s spread has had its biggest jump since August last year, with Halpenny arguing that the outcome of the Fed meeting is certainly US dollar negative.

Fed credibility is being questioned today, and after a big jump in inflation expectations, the US dollar outlook has worsened.