US Dollar: Strength builds on yields – ING

ING’s Francesco Pesole highlights that the US Dollar is gaining strength due to rising global bond yields and oil prices, re-establishing a positive correlation with long-end US yields. He believes that a marginal surprise in US CPI could be sufficient to fully price a September Fed hike, with the DXY reaching 100.0 as a realistic target in the coming weeks.

A smaller-than-expected $6bn Treasury buyback earlier translated into an even smaller $5.19bn operation yesterday. US Treasury Secretary Scott Bessent’s reluctance to intervene heavily to fight the bond market remains crucial for the positive USD-back-end rates correlation to regain its footing.

Positive USD expectations boosted FOMC pricing for next week by 18 basis points, driven by the oil rally and a modest upward revision to July PPI, while August figures matched consensus. Today’s August CPI release could provide the green light to fully price a September hike, even with a marginal upside surprise.

If inflation continues to improve through August, a downside surprise could make Federal Reserve Chair Kevin Warsh raise the bar for incoming data to overturn the hawkish narrative. However, Christopher Waller suggested no hike would be needed if inflation keeps improving through August.

Oil may be the key factor, having rallied around 15% recently. A softer CPI print could weigh on the dollar, but a surprise may not be enough to push September hike pricing below 50%, a level sufficient to persuade unconvinced FOMC members. The dollar shows upside potential, and the yen rally has stalled, not negatively impacting USD.

Developments in the Gulf increase the odds of higher oil prices, while stress in bond markets bleeds into risk assets, favoring a defensive rotation back into the dollar. The DXY 100.0 target is becoming more attainable.