US Dollar: Losing momentum as fiscal risks rise – DBS

DBS Group Research's Philip Wee notes that the US Dollar is losing strength as the US reassesses its intervention with Japan, altering Bank of Japan and Federal Reserve forecasts, and as rising fiscal risks in the US increase. He points out that higher long-term US yields now indicate fiscal worries rather than growth, and fears that this could weaken the usual connection between higher US yields and a stronger USD.

Markets still view the US-Japan interventions mainly as Tokyo's effort to stop the yen's fall, missing the possible negative effects on US Treasury assets and the dollar. A bigger worry for the USD is the increase in long-term US bond yields, even though there were negative nonfarm payrolls, a fall in retail sales, and slower year-over-year inflation of CPI and PPI.

In summary, a lack of Fed hike expectations, ongoing US fiscal worries, and high US long-term Treasury yields might weaken the relationship between higher US yields and a stronger USD. Those holding significant short USD positions are in a vulnerable position. Thus, the upcoming Jackson Hole Symposium in August, which may expose policy uncertainty for US bondholders due to limited forward rate guidance and heavy Treasury issuance, could prove significant.