US Dollar: Rising yields support risk-off tone – MUFG

MUFG’s Lee Hardman notes the US Dollar (USD) has strengthened ahead of the FOMC meeting as Fed tightening expectations are repriced higher. The US Dollar Index (DXY) has recovered to levels seen before the August Treasury buyback announcement, with US yields rising sharply. MUFG highlights modest FX spillovers so far, but warns high beta and emerging market currencies face greater downside risks if bond yields and energy prices keep climbing.

Stronger Dollar tracks higher US yields

"The US dollar has continued to trade at modestly stronger levels overnight ahead of tomorrow’s FOMC meeting."

"The stronger US dollar has been encouraged by the hawkish repricing of Fed rate hike expectations."

"The US rate market now expects the Fed to deliver almost 100bps of hikes in the year ahead fully reversing last year’s rate cuts that totalled 75bps."

"Measures of volatility in both the equity and FX markets have started to pick up but are still at low levels. It highlights that spillovers from rising bond yields into the FX market have been modest so far."

“Similar price action has also been evident amongst emerging market currencies where heat commodity and high-yielding currencies have underperformed such as the Chilean peso, South African rand, Hungarian forint and Mexican peso. Downside risks for those currencies would intensify if rising bond yields and energy prices triggered a deeper correction lower for risk assets heading into year end.”

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