DBS Group Research’s Philip Wee argues that the US Dollar (USD) is losing momentum as markets reassess United States (US)-Japan intervention, shifting Bank of Japan (BoJ) and Federal Reserve (Fed) expectations, and rising US fiscal risks.
He highlights how higher long-term US yields now reflect fiscal concerns rather than growth, and warns that this may weaken the traditional link between higher US yields and a stronger USD
Fiscal risks and policy shifts weigh on USD “Markets continued to view the joint US-Japan interventions largely through the lens of Tokyo’s struggle to arrest the JPY’s decline, paying insufficient attention to the potentially negative implications for US Treasury holdings and the USD.” “More troubling for the USD was the rise in US long-term bond yields despite negative nonfarm payrolls, a monthly decline in retail sales, and slower year-on-year CPI and PPI inflation.” “Overall, fading Fed-hike expectations, persistent US fiscal concerns, and elevated US long-term Treasury yields risk weakening the link between higher US yields and a stronger USD.” “Speculators with large short USD positions are standing on fragile ground.” “That puts the Kansas Fed’s Jackson Hole Symposium scheduled for August 27-29 firmly in focus. Rather than reinforcing the USD’s haven credentials, the gathering could expose the policy uncertainty facing US bondholders due to limited forward rate guidance amid heavy Treasury issuance.” Author