US Dollar: Limited upside as fiscal plans questioned – MUFG
MUFG’s Derek Halpenny notes that the US Dollar has weakened as investors focus on potential US Treasury measures to stem the decline in Treasury yields, while Japanese inflation data supports expectations for a 25bp BoJ rate hike in September.
The US Dollar has experienced a decline due to investors focusing on potential actions by the US Treasury to address falling Treasury yields, while Japanese inflation data indicates a possible 25 basis point rate hike by the BoJ in September. Derek Halpenny of MUFG remains skeptical about the US making credible fiscal consolidation progress, thus limiting further EUR/USD gains in the near term.
The US Dollar weakened further today after stabilizing the previous day, as market participants concentrate on potential further actions from the US Treasury to counter declining UST bond yields. Although 10-year Treasury yields remained unchanged, Japanese Government Bond (JGB) yields surged following the release of July's nationwide Consumer Price Index (CPI) data, which showed a return toward the 2.0% level.
The core-core CPI rate climbed to 1.9%, driven by certain food items and dining out. This aligns with the prevailing market pricing and MUFG's expectation of a 25 basis point BoJ rate hike at the upcoming policy meeting in September. The US Treasury has signaled it is taking steps to bolster fiscal consolidation by announcing an increase in liquidity support buyback operations in the 10-year to 20-year and 20-year to 30-year bond sectors, raising the maximum from $2 billion per operation to at least $4 billion, effective September 9 and running to November 4.
However, MUFG remains doubtful about the credibility of such a move, as it would not benefit UST bonds or the dollar. The weakened US Dollar's support is also undermined by Middle East risks. For Europe, persistent high natural gas prices further complicate the outlook for EUR/USD. Despite positive US PMI data boosting the Pound Sterling, the US Dollar struggles to maintain its resilience amid the week's Treasury Department decision to increase long-term bond purchases.
Meanwhile, EUR/USD consolidates its weekly gains near 1.1700 as investors await preliminary August PMI surveys for the US. Gold maintains modest gains near its highest level since early June, trading just above $4,550, benefiting from a weaker US Dollar. The cryptocurrency market remains bullish, with Bitcoin surpassing $77,000, and altcoins like Ethereum and Ripple following a similar positive trajectory.
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