US Dollar: Yields support Greenback strength – OCBC

US Treasury yields have risen, bolstering the strength of the US Dollar, according to OCBC strategists Sim Moh Siong and Christopher Wong. They attribute this to robust US economic data, persistent inflation, and high energy prices. The upcoming US labor report next week is seen as a critical risk, as falling jobless claims could indicate a potential upside surprise and further Fed tightening.

Resilient economic data, soaring energy prices, and ongoing inflation concerns are driving up Treasury yields, supporting the US Dollar while putting pressure on rate-sensitive and carry-oriented assets. The consensus expects non-farm payrolls to increase by 100,000 in September, down from 162,000 in August, with the unemployment rate remaining steady at 4.1%.

Fed Chair Jerome Powell has suggested using the four-week average of initial jobless claims as a more timely indicator of labor market conditions, but the actual payrolls report remains the main focus for traders. With initial jobless claims declining, the possibility of an unexpected increase in the payrolls report is growing. This could reinforce the expectation of additional Fed rate hikes, maintaining higher US yields and further supporting the US Dollar.

Fed officials, including New York Federal Reserve President Loretta Mester and Cleveland Federal Reserve President Thomas Haldeman, have expressed concerns about inflation, with some suggesting that additional tightening measures might be necessary if inflation does not ease. Market expectations currently suggest a 70% chance of a 25 basis point rate hike in October, reflecting the growing belief that the Fed's efforts to combat inflation are far from over.