US Dollar: Policy reality supports resilience – OCBC

OCBC Bank strategists Sim Moh Siong and Christopher Wong maintain that Treasury buybacks are unlikely to cause prolonged US Dollar weakness without direct Federal Reserve intervention to cap yields. High US inflation and strong economic growth give a hawkish stance to the Federal Reserve, restricting fiscal-monetary coordination.

They remain neutral on the USD, emphasizing Jackson Hole could strengthen the Fed’s commitment to curb inflation. For the USD to noticeably weaken after the Treasury’s buyback, markets would need proof the Fed is willing to aid the Treasury in maintaining yields. Current US data suggest persistent inflation and robust growth. July core PCE inflation, the Fed’s preferred inflation indicator, increased 0.2% month-over-month and 3.3% year-over-year, aligning with expectations.

Although inflation has softened from previous highs, annual price pressures remain elevated, reinforcing a hawkish bias in Fed policy. For now, the analysts prefer a neutral position on the USD rather than chasing isolated USD weakness. The Fed’s reaction and potential lessening of focus on inflation control have raised market interest in Chair Warsh’s Jackson Hole remarks.

If Warsh and other Fed officials counter debasement fears and reaffirm their dedication to bringing inflation back to the 2% target, the USD might gain support. Recent GBP/USD volatility, with the pair lately edging closer to the 1.3600 level, and EUR/USD fluctuating around 1.1650, amid uncertainty, highlight cautious market sentiment ahead of Friday’s data and Fed Chair Warsh’s speech at Jackson Hole.

Gold’s recent pullback, however, shows signs of recovery, nearing the $4,600 level. Oil markets may appear more stable now, but diesel’s premium over WTI has surged above $100 per barrel, a first in months. Fed Chair Kevin Warsh is set to deliver his inaugural Jackson Hole address on Friday, sparking speculation about potential interest rate decisions in September.