MUFG’s Lee Hardman and Abdul-Ahad Lockhart note the US Dollar (USD) is trading close to year-to-date highs as markets debate whether the Federal Reserve (Fed) will follow its hawkish rhetoric with actual rate hikes. They highlight falling Oil prices, uncertainty over Chair Warsh’s reaction function, and today’s US Personal Consumption Expenditures (PCE) Price Index deflator as key to the Dollar’s near-term direction.

Dollar strength tied to Fed signals

"The major foreign exchange rates have remained relatively stable overnight with the US dollar continuing to trade close to year-to-day highs."

"It is one of the reasons why we still don’t expect the Fed to back up tough talk on inflation by hiking rates hikes this year."

"In contrast, the US rate market has taken the opposite view that the Fed will back up tough talk on inflation by hiking rates this year."

"If the Fed is serious about restoring price stability, a significant tightening of monetary policy will be required so it makes sense that more hikes have been priced in recently encouraging a stronger US dollar."

"We expect the US dollar to continue to trade at stronger levels until it is either challenged by incoming economic data showing slowing inflation and/or any indications from the Fed that they will not follow through with rate hikes."

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