US Dollar: Warsh message supports limited upside – MUFG
MUFG’s Derek Halpenny notes the US Dollar is holding most of its post-FOMC gains after a 25bps hike and hawkish guidance from Fed Chair Warsh. The Fed’s projections imply only gradual disinflation and a higher long-run rate, but market pricing had already anticipated more tightening.
MUFG’s Derek Halpenny highlights that the US Dollar has retained most of its post-FOMC gains following a 25 basis points rate hike and hawkish comments from Fed Chair Jerome Warsh. Warsh's statement indicating the removal of a dose of accommodation hinted at the potential for additional tightening. Despite this, the market had already anticipated further rate hikes.
The dollar is expected to see limited upside as other G10 central banks, including the European Central Bank, the Bank of England, and the Bank of Japan, are also projected to raise rates. The Fed Chair's comments suggest that a certain level of accommodation still exists, implying that further rate hikes will be necessary. The median dot projections for 2026 and 2027 suggest another rate hike, with no cuts until 2028, when the median dot drops by 25 basis points and then by another 25 basis points in 2029.
This cautious approach implies that achieving further core CPI reduction will require more than just one additional hike. Warsh's hawkish stance and focus on price stability may not lead to a significant sell-off in rates or a substantial US dollar rally. Additionally, the US dollar gains are likely to be constrained by other central banks turning more active in their rate hikes.
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