Brown Brothers Harriman’s (BBH) Elias Haddad notes the Dollar index (DXY) is consolidating near its 200-day moving average and is expected to stay within the 96.00-100.00 range. The firm highlights a supportive US macro backdrop for USD, but warns that rising Treasury yields and strained fiscal credibility pose a headwind. Markets fully price one 25bps Fed hike over the next year.

Dollar supported but capped by fiscal strain

"The dollar index (DXY) is consolidating recent gains near resistance at its 200-day moving average. The US macro backdrop (high inflation, stable labor demand) argues for the Fed to stay restrictive for longer which is USD supportive. The swaps curve virtually fully prices a 25bps Fed funds rate hike in the next 12 months."

"In parallel, US fiscal credibility is increasingly under strain as 10-year Treasury yields move closer to the roughly 5.3% pace of nominal GDP growth seen over the past decade. That narrows the buffer between growth and borrowing costs, raising concerns about debt sustainability and acting as an important headwind for USD."

"We expect DXY to remain anchored within its 96.00-100.00 range that’s held for nearly a year."

"US consumer spending has been resilient so far, contributing to half the 2% annualized real GDP growth over Q1. Going forward, the Atlanta Fed GDPNow model estimates annualized real GDP growth of 3.7% in Q2, and real personal consumption expenditure at 1.8% vs. 1.6% in Q1."

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