US Dollar: Fed story supports renewed strength – ING

ING’s Chris Turner notes the Dollar is holding gains after Kevin Warsh’s hawkish comments and a renewed spike in energy prices, with markets now expecting a Federal Reserve rate hike in September. Turner argues the cyclical Fed story can outweigh Dollar debasement concerns, sees DXY grinding higher toward 100.10/20, and highlights risks from long-end US bond dynamics.

Fed expectations underpin Dollar gains

"There remains much focus on the long end of bond markets, where little appetite for fiscal consolidation in recent years seems to be coming home to roost. As Francesco Pesole highlighted yesterday, there remain fears that Treasury Secretary Scott Bessent will dip into his large toolkit again to support the bond market and traders will look to hit a bid in USD/CHF to express the dollar debasement trade."

"That is the risk. But the new baseline seems to be that the Fed will, after all, hike rates in September. Fed Chair Kevin Warsh has made it reasonably clear that inflation is not falling quickly enough to target and, given a reasonably strong economy, the Fed will need to act."

"We think the cyclical Fed story can trump the dollar bearish debasement theme and some bearish US yield curve flattening can see the dollar advance against the low-yielders – and especially against the Swiss franc, given that Swiss policy rates look most anchored near zero."

"If we are wrong and are underestimating the pressure on the long end to sell off, then the yield curve steepening from the long end can probably drag the dollar a little lower even as high-yield FX underperforms amidst higher generalised volatility."

"We favour DXY grinding higher to the 100.10/20 area and probably moving a little higher tomorrow on the Waller event."