US Dollar: Soft despite supportive fundamentals – ING

ING’s Chris Turner notes the Dollar has been unexpectedly soft despite higher energy prices and firm short-dated US rates ahead of the US August CPI and a likely 25bp Fed hike. He highlights strong equities and a fragile USD/JPY as key drags on the Dollar and does not expect DXY to break key support immediately, though a USD/JPY-led drop is possible.

Soft performance puzzles ING analysts

"Dollar price action this week has been a little disappointing/confusing. Higher energy prices due to an escalation in the Gulf will direct more trade flows towards the US at the expense of Europe and Asia. At the same time, US short-dated rates remain relatively elevated as they await Friday's US August CPI release – what should be the final piece of the puzzle for the Fed's policy decision next week. We are expecting a 25bp Fed rate hike."

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"The fact that the dollar is not stronger may be attributable to both the investment environment and to developments in USD/JPY. On the former, global equity markets remain near their peaks as the AI investment boom keeps global growth relatively resilient. As mentioned earlier this week, one of the tightest FX correlations out there is the negative one between equities and the dollar."

"A very fragile USD/JPY is probably also contributing to the dollar malaise, as global macro hedge funds position for a downside break of 150 over the coming months on expectations that Japanese policymakers will deliver on their side of some grand bargain with Washington."

"On that front, the bond market will be in focus today as the US Treasury starts its buy-back operation of longer-dated Treasuries, plus auctions $39bn and $22bn of 10 and 30-year bonds today and tomorrow, respectively."

"We don't fully understand why the dollar is not reacting to higher energy prices and do not see a strong case for DXY to immediately break support at 98.55/65. If it were to break, we suspect USD/JPY would be the driver, and a quick drop in DXY to 98.00 could be seen."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)