US Dollar: Fed shift and AI-driven risk backdrop – MUFG

MUFG’s Lee Hardman notes the US Dollar is trading at stronger levels as higher US yields reflect growing expectations for multiple Federal Reserve rate hikes following the energy price shock. FOMC minutes signalled a gradual hawkish shift but did not fully endorse aggressive tightening. Nvidia’s blockbuster earnings and AI optimism are supporting global risk sentiment, which has recently limited broader Dollar gains.

Fed minutes and Nvidia reshape Dollar drivers

"The US dollar has continued to trade at stronger levels overnight supported by the recent adjustment higher in US yields. The 2-year US Treasury yield has increased by around 40bps from last month’s low as market participants have moved to price in a higher probability of multiple Fed rate hikes in response to the energy price shock."

"It will reinforce expectations that the Fed could drop their easing bias as soon as at the next policy meeting in June. Furthermore, a majority of FOMC members felt the need to indicate that they would be prepared to hike rates if inflation were to continue to run persistently above 2.0%."

"However, the Fed staff’s updated forecasts show inflation falling back to “close to 2.0%” next year in the base case scenario which does not currently support the case for higher rates. Overall, the minutes continue to show a gradual hawkish shift is underway at the Fed but does not fully back market expectations for multiple rate hikes."

"The report will boost investor confidence that the roll out of AI remains a tailwind for the global economy at time when it also facing an unprecedented energy supply shock. Buoyant global investor risk sentiment has worked against the US dollar recently even though US equities have performed strongly driven by AI-related stocks."

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