US Dollar: Warsh boost fades as Fed pricing holds – ING

ING’s Francesco Pesole says the US dollar has lost nearly half of its post-Jackson Hole gains, even as short-term interest rates remain stable. He believes worries about long-term yields, and potential Treasury intervention, are fueling a decline narrative. ING's expectations are based on optimistic US data this week, which could lead to a September Federal Reserve hike and bring the dollar back to 100.0 level.

The dollar has regained around 50% of the gains sparked by Federal Reserve Chair Kevin Warsh’s hawkish speech on Friday. This is not because people are changing their minds about the Fed’s tightening plans. The 2-year SOFR rate has stayed above 4.20%, which is more than 10 basis points higher than before Warsh's speech. This might worry dollar supporters because it shows markets still think higher long-end yields could be due to possible Treasury intervention, which is boosting the debasement trade.

This shows the lasting impact of Treasury Secretary Scott Bessent’s buyback move on the dollar. However, we should be careful about the dollar correcting further this week. Markets might only reassess September FOMC expectations after seeing some disappointing data releases. But we don't think that will happen. For now, we don't think the relationship between the dollar and short-term rates is broken.

As people become more sure about a September hike, the dollar should find support at the beginning of the month. September also tends to be a strong month for the dollar.