US Dollar: Fed expectations support gains – BBH

Brown Brothers Harriman’s (BBH) Elias Haddad notes the US Dollar (USD) is supported by widening US-G6 yield spreads and resilient US data, which keep Federal Reserve (Fed) rate hike expectations alive in the near term. However, Haddad argues further upside is capped as other major central banks also tighten, limiting policy divergence and reducing the likelihood of new cyclical highs for the USD.

Yield spreads and data back USD

"USD extended yesterday’s upswing underpinned by widening US-G6 two-year bond yield spreads. Favorable US economic activity and a stable labor market will keep Fed rate hike expectations firmly in play in the near-term. But we don’t expect USD to make new cyclical highs because tightening by other major central banks limits monetary policy divergence."

"US manufacturing sector growth momentum eased more than expected in August, but price pressures persist. The headline index dipped to a two-month low at 54.6 (consensus: 55.2) vs. 55.6 in July driven by slower expansions in both the New Orders and Employment indexes. The Prices Paid index held at 71.1 (consensus: 70.8) for a second straight month signaling ongoing upside inflation risks."

"The JOLTS July survey reinforced the US labor market’s low hire, low fire backdrop. The hiring rate fell -0.2ppt to 3.2%, lowest since February. The layoffs rate dipped -0.1ppt to 1.0%, remaining within its 1.0-1.2% range that’s held for the past two years."

"US August ADP private payrolls is up next (1:15pm London, 8:15am New York). Consensus is for the economy to add +47k jobs vs. +44k in July. The Fed Beige Book (7:00pm London, 2:00pm New York) will offer fresh anecdotal insights into the US growth and inflation outlook."

"The global bond market rout deepened reflecting firmer crude oil prices and a resilient global growth outlook. Aside from the UK and Japan, the bond market selloff is not worrisome as 10-year bond government yields for most major economies are still trading below nominal GDP growth."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)