US Dollar: Fed hike keeps upside risks – BBH

Brown Brothers Harriman’s (BBH) Elias Haddad notes that the US Dollar (USD) is holding gains after a hawkish Federal Reserve (Fed) hike, with 10-year Treasury yields retreating and equities firmer. The FOMC raised rates by 25bps and signaled more work is needed to bring inflation back to target. Haddad concludes that global tightening caps USD, but US growth keeps USD risks skewed higher.

Hawkish Fed supports Dollar upside

"USD is holding to its post-Fed rally, 10-year Treasury yields are retreating, and S&P500 futures are up. The FOMC delivered a hawkish hike. Immediate market reaction saw USD and short-term yields rise, while stocks dropped."

"As was widely expected, the FOMC delivered a 25bps hike to a target range of 3.75%-4.00% after five straight holds, marking its first hike since July 2023. It was hawkish hike because: (i) The decision was unanimous. (ii) 2026 dot moved towards market pricing pointing to another 25bps hike by year-end. (iii) Real GDP growth was revised higher for 2026 and 2027. (iv) The unemployment rate was tweaked down across the forecast horizon. (v) PCE inflation is forecast to reach the 2% target a year later in 2029."

"Importantly, Fed Chair Kevin Warsh signaled the Fed still has more work to do to bring inflation back to target. Warsh stressed that “inflation is too high and has been for too long” adding that underlying inflation trends have not “meaningfully improved.” Warsh pointed out again that “too many categories are still posting increases above 3 percent, on both a 6- and 12-month basis.”"

"Bottom line, tightening by other major central banks limits policy divergence and suggests USD is unlikely to make new cyclical highs. But the US growth advantage relative to other major economies skews USD risk to the upside."

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