US Dollar: Lower short-term yields weigh on the Greenback – MUFG

The US Dollar (USD) is currently experiencing a weaker standing due to reduced expectations of Federal Reserve (Fed) rate hikes, as highlighted by MUFG's Lee Hardman. This trend is fueled by weaker labor data and a mixed United States (US) Producer Price Index (PPI) report. Short-term US yields are falling, yet the Dollar index remains above its 200-day moving average.

Despite this, robust US equities, particularly in the AI-related tech sector, and strong S&P 500 earnings are providing some support. The scaling back of Fed rate hike expectations has opened up more room for the Fed to keep rates on hold, given the slower private employment and wage growth and limited evidence of higher energy prices feeding into core inflation following the US-Iran conflict.

Consequently, the Fed is expected to give less significance to a significant inflation surprise in July. The ongoing decline in short-term US rates has been hindering the USD's performance this month, but it has not yet been strong enough to bring about another downward shift after the sell-off at the end of the previous month. The dollar index is still above support levels from the 200-day moving average, sitting around 99.20.