Warsh Speech Supports Greenback Amid Hawkish Fed Signals
US dollar bulls got a boost last Friday after Fed Chairman Kevin Warsh's speech at Jackson Hole, where he reaffirmed his inflation-first stance and hinted at another rate hike in September. According to DBS Group Research economist Philip Wee, the futures market reinstated a meaningful probability of a 58% chance of a rate hike at the upcoming FOMC meeting.
Warsh's comments, while not overly detailed, suggested that the Fed still has 'work to do' if underlying inflation does not move towards 2% with sufficient speed. This stance is in line with his previous opposition to forward guidance and refusal to specify a reaction function.
The Treasury's recent announcement to at least double the maximum size of its long-end buyback operations may have raised concerns, but for now, the USD benefits from hawkish Fed signals and the 'Bessent Put' cushioning effect. However, the greenback's longer-term structural risks remain intact, including the risk of de-dollarisation.
Markets will be watching closely as payrolls arrive on September 4, followed by the US Labor Day holiday on September 7. The timing creates an awkward gap, and a stronger-than-expected August nonfarm payrolls could test the 'Bessent Put' even further.