US Dollar: Upside risks persist as data watched – BBH

Brown Brothers Harriman’s Elias Haddad observes the US Dollar experienced an upward trend last week, reaching fresh cyclical highs as the DXY index surged. This was accompanied by an increasing gap in US-G6 interest rates and a deepening global bond selloff. September’s weaker-than-expected Nonfarm Payrolls (NFP) report diminished the probability of a Federal Reserve rate hike in October, but Haddad contends that US economic growth outperforming expectations and foreign demand for US securities maintain upside risks for the USD, despite policy challenges.

The DXY index made new cyclical highs in line with widening US-G6 interest rate differentials, while the global bond market selloff deepened due to a more hawkish policy outlook and increasing bond issuance by large tech firms and concerns over sovereign debt sustainability. Although the soft NFP data provided some relief for the USD rally, it still aligns with a stable labor market and does not undermine the Fed’s tightening bias.

Consequently, the brief respite in Treasuries proved ephemeral. Tightening policies abroad and the possibility of an October Fed pause present challenges for the USD. However, US growth outperformance and strong foreign appetite for US securities keep the USD's upside risks intact. The September FOMC minutes, released on Wednesday, might appear somewhat outdated given recent calls for patience from key Fed officials like Williams, Jefferson, and Bowman.

Notably, the Federal Reserve's October rate hike was accompanied by a clear hawkish stance and unanimous support.