US Dollar: Weakness may stabilize as US growth advantage persists - BBH

Brown Brothers Harriman’s (BBH) Elias Haddad explains that the Treasury’s buyback announcement caused shorter-term Treasuries to decline initially, resulting in a weaker Dollar and a rise in Gold prices. He believes that the US economic growth advantage will help stabilize the USD this week, offsetting fiscal concerns. Futures suggest a modest likelihood of additional Fed tightening, but BBH anticipates risks of a dovish Fed adjustment due to contained inflation and labor data.

The Treasury’s buyback announcement was the main focus of market activity last week, creating confusion between improved market functioning and suppressed borrowing costs to address fiscal stress. BBH anticipates the USD slump will stabilize during the week. The widening US growth advantage, as indicated by composite PMIs, may counteract some of the negative impact on USD from worsening fiscal credibility.

ADP private employment change for the week ending August 8 will be important on Tuesday; it currently indicates weakening labor demand. Fed funds futures price a 40% chance of a 25bps increase to 3.75-4.00% at the September 16 meeting, totaling nearly 50bps in tightening over the next twelve months. BBH argues the risk is more likely to be a dovish Fed repricing, as the US labor market is balanced, wage growth aligns with the Fed’s 2% inflation target, and policy is already restrictive.

July US PCE is expected to show contained inflation and flat consumer spending activity. Core PCE is projected to rise 0.2% month-over-month and maintain a 3.3% annual increase. Real personal spending is expected at 0.0% month-over-month, the same as in June.