US Dollar: Higher yields and oil support – MUFG

The US Dollar has experienced a modest increase in value as US Treasury yields have risen to notable levels, with the 10-year yield hitting 5.00% and the 2-year yield reaching 4.66%. Lloyd Chan of MUFG points out that market forecasts assign an over 90% probability to a 25 basis point Federal Reserve rate hike at the upcoming FOMC meeting, with expectations of a total of two hikes by the end of the year.

Chan emphasizes the Fed's challenge in balancing ongoing inflation pressures from high oil, gasoline, and agricultural prices against the consequences of stricter monetary policy on US debt servicing and the housing market. Over the past year, US 10-year yields have increased by more than 80 basis points, while yields in Asia and Europe have also risen due to rising commodity prices.

The focus now shifts to the FOMC meeting decision, with markets pricing in more than a 90% probability of a 25 basis point Fed rate hike, and anticipating a cumulative two hikes by year-end. However, the Fed faces a complex trade-off, as high inflation remains a concern, with oil prices above USD100 per barrel, gasoline prices above $4 per gallon, and agricultural commodity prices at elevated levels.

Additionally, stricter monetary policy increases debt servicing costs for the US government and puts additional strain on interest-rate-sensitive sectors like housing.