US Dollar: Upside risks persist as data watched – BBH

Brown Brothers Harriman’s Elias Haddad notes the Dollar rallied broadly last week as DXY hit new cyclical highs alongside widening US-G6 rate differentials and a deepening global bond selloff. Softer September NFP reduced odds of an October Fed hike, but BBH argues US growth outperformance and foreign demand for US securities keep USD risks skewed higher despite policy headwinds.

USD rally faces mixed policy signals

"USD rallied against all major currencies last week, with the DXY index making new cyclical highs in line with widening US-G6 interest rate differentials. In parallel, the global bond market selloff deepened, driven by a tighter expected policy path, crowding-out effects due to the increasing bond issuance of large tech firms and concerns over sovereign debt sustainability."

"Friday’s soft September nonfarm payrolls (NFP) took some steam out of the USD rally, by reducing odds of a back-to-back Fed funds rate hike in October. Still, the report remains consistent with a stable labor market and does not challenge the Fed’s tightening bias. That’s why the relief rally in Treasuries proved short-lived."

"Tighter policy elsewhere and a growing case for an October Fed pause are USD headwinds. But US growth outperformance and strong foreign appetite for US securities keep USD risks skewed to the upside."

"The September FOMC minutes (Wednesday) are likely to look somewhat dated after recent calls for patience from key Fed officials (Williams, Jefferson, and Bowman). Recall, the FOMC’s September hike came with a clear hawkish tilt and unanimous backing."

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