Brown Brothers Harriman’s (BBH) Elias Haddad notes the US Dollar (USD) has steadied near a one‑month low after softer United States (US) Producer Price Index (PPI) and Consumer Price Index (CPI) data weighed on Fed funds pricing. Haddad argues US economic outperformance, the Fed’s commitment to 2% inflation and strong foreign demand for US long‑term securities should keep the Dollar supported, with policy expectations highly sensitive to upcoming inflation data.

Fed stance and data drive Dollar

"USD steadied after sliding to near a one-month low yesterday. Cooler than expected June PPI inflation reinforced the moderation in June CPI inflation, weighing on the Fed funds futures curve and undermining USD."

"We think the dollar’s decline is overdone. US economic outperformance, the Fed's resolve to get inflation back to 2% anchoring hawkish pricing, and strong foreign demand for US long term securities should keep USD supported."

"New York Fed President John Williams and Fed Governor Lisa Cook delivered speeches yesterday that offered fresh insights into how policymakers are assessing the inflation outlook. The key takeaway is that the FOMC is united on holding rates for now, but less united on how durable the inflation threat is, implying policy rate expectations are likely to remain particularly sensitive to incoming inflation data."

"The July Fed Beige book also pointed to a mixed inflation outlook. Contacts in some Districts expect “inflation to continue at its current pace, while contacts in others expected inflation to slow, in part due to falling fuel prices.”"

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