US Dollar: Fed expectations support gains – BBH

Brown Brothers Harriman’s Elias Haddad highlights that the US Dollar is bolstered by widening US-G6 yield spreads and strong US economic data, which maintain Federal Reserve rate hike expectations in the short term. Nonetheless, Haddad suggests that further gains are restricted as other major central banks also raise rates, diminishing policy divergence and diminishing the probability of USD reaching new cyclical peaks.

The USD experienced its upward trajectory yesterday, propelled by widening US-G6 two-year bond yield spreads. Robust US economic performance and a stable job market will sustain Fed rate hike expectations in the near future. However, the USD is not anticipated to achieve new cyclical highs due to tightening measures from other prominent central banks curbing monetary policy divergence.

While the US manufacturing sector growth slowed more than anticipated in August, inflation pressures remain. The manufacturing sector index declined to a two-month low of 54.6 (below expectations of 55.2) compared to July's 55.6, primarily due to diminished expansions in New Orders and Employment indexes. The Prices Paid index remained steady at 71.1 (consensus: 70.8), indicating persistent upside inflation risks.

The JOLTS July survey reflected a low hiring and firing environment in the US labor market, with hiring rates dropping to 3.2% (lowest since February) and layoffs rates falling to 1.0% (within the 1.0-1.2% range for the past two years). The upcoming ADP private payrolls report for August is expected to show an increase of 47k jobs (vs. 44k in July).

The Federal Reserve Beige Book (7:00pm London, 2:00pm New York) will provide further qualitative perspectives on US growth and inflation. The global bond market slump intensified due to higher crude oil prices and sustained global growth prospects. Except for the UK and Japan, the bond market decline is not alarming as 10-year government bond yields for most major economies are still lower than nominal GDP growth.