Dollar Towers on Fed Rate Hike Bets

The US dollar index rose to 99.5 on Friday, extending the rebound from the three-month low of 98.8 from August 21st, and tracking the surge in short-term Treasury yields after Fed Chairman Kevin Warsh signaled a firmer stance against inflation. The Fed Chairman stated that underlying inflation was not significantly lower in the last few months and added that the labor market appears to be at full employment. On top of that, Warsh stated that the Fed is tracking the PCE index as an inflation gauge, using stricter rhetoric than earlier suggestions that one of the newly created task forces could shift the Fed's target gauge. Rate futures reflected a swing to positions of a Fed rate hike next month. Also strengthening the dollar, annual revisions to nonfarm payrolls were well under recent amounts, indicating robust employment. In the meantime, signs of higher inflation in the Eurozone added to the consensus of an ECB rate hike, limiting the rebound for the DXY.

The dollar index was little changed around 99.1 on Friday as investors awaited Federal Reserve Chair Kevin Warsh’s speech at the annual Jackson Hole symposium later in the global day for clues about the outlook for US interest rates. Still, the greenback was on track to end the week slightly higher as a hotter-than-expected US inflation this week reading supported expectations for a Fed rate increase before year-end, with the probability of a hike by December remaining above 70%. For the upcoming September meeting, markets are currently pricing in around a 65% chance that the Fed will keep rates unchanged. Meanwhile, Kansas City Fed President Jeff Schmid said monetary policy is not restraining the economy. Elsewhere, investors continued to assess the implications of the US Treasury’s expanded debt buyback program, which heightened concerns about the risks of a US debt crisis and potential dollar weakness.

The dollar index traded above 99 on Thursday after advancing in the previous session, supported by stronger-than-expected US economic data that reinforced expectations for a Federal Reserve interest rate hike before year-end. The PCE price index rose 0.2% month-on-month in July, exceeding estimates of 0.1% and reversing a 0.1% decline in June, while annual inflation climbed to 3.7% versus 3.6% expected. Investors now await Fed Chair Kevin Warsh’s speech at the annual Jackson Hole symposium on Friday for further clues, although he is unlikely to offer a clear indication of the central bank’s policy decision in September. Meanwhile, oil prices fell further amid signs of diplomatic progress in the Middle East, helping ease near-term inflation concerns. Investors also continued to weigh the implications of the US Treasury’s expanded debt buyback program and broader US fiscal risks.