US Dollar: Yield support erodes on weaker inflation – DBS
DBS Group Research economist Philip Wee notes that softer US CPI and labour data kept DXY locked in a 99.4–100.1 range after the USD/JPY sell-off linked to joint US-Japan interventions. Markets sharply reduced the implied probability of a September Federal Reserve hike.
DBS Group Research economist Philip Wee explains that softer US inflation data has weakened support for the US Dollar. After a sell-off in USD/JPY due to joint US-Japan interventions, the DXY Index remained within a 99.4-100.1 range. Markets now view the likelihood of a September Federal Reserve rate hike as lower, dropping to 40% from 72% at the end of July.
The recent negative nonfarm payrolls and slower CPI inflation readings contributed to this shift. With average hourly earnings slightly below the core inflation rate amid a soft labor market, Fed officials may be less worried about potential second-round effects of inflation following the pandemic. The US budget deficit widening and fiscal position weakening further reduce the yield advantage of US bonds backing the Dollar.
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