Dollar Sinks to Fresh Lows

August 19, 2024

Dollar Sinks to Fresh Lows

  • Money market expectations for an aggressive Fed easing cycle continues to weigh on USD.
  • The Democratic National Convention kicks off today until Thursday.
  • There are no policy-relevant G10 economic data releases today.

Please see our Drivers for the Week Ahead for an in-depth look at what markets are facing this week.

USD is drifting lower against all major currencies with the DXY index hitting a seven-month low. Money market expectations for an aggressive Fed easing cycle and the modest improvement in financial market risk appetite, reflected by the recovery in global equity markets, are weighing on USD.

Fed funds futures are still pricing-in about 100bps of easing by year-end. In our view, the encouraging US macro backdrop of solid domestic demand activity and moderate disinflation suggests the Fed is unlikely to cut the funds rate as much as is currently priced-in. As such, there is room for an upward reassessment in Fed funds rate expectations in favour of USD and Treasury yields.

Indeed, San Francisco Fed President Mary Daly (FOMC voter) emphasised the need for gradual interest rate cuts, pointing out the US economy is “not in an urgent place” and the labor market was “not weak”. Daly added “gradualism is not weak, it’s not slow, it’s not behind, it’s just prudent.”

Today, Fed Governor Chris Waller gives welcoming remarks at a Money, Banking, Payments, and Finance workshop (2:15pm London). But Friday’s speech by Fed Chair Jay Powell on the economic outlook at the Jackson Hole Economic Policy Symposium (Thursday to Saturday) takes the spotlight. We expect Powell to signal the Fed is prepared to begin cutting the funds rate in September and push back against any sort of pre-commitment to an aggressive easing path.

The Democratic National Convention kicks off today until Thursday. Vice president Kamala Harris will likely unveil more of her economic program this week. Last Friday, Harris laid out her agenda to lower costs for American families which includes tax cuts for the middle class, reducing grocery costs, and lowering the costs of owning and renting a home.

The nondefense discretionary spending so far proposed by Harris largely mirror President Joe Biden’s 2025 budget proposal. Overall, the 2025 budget is fiscally responsible and unlikely to add to inflation pressures. According to the Congressional Budget Office (CBO), the discretionary funding and outlay proposals over the 2025-2029 period would be less than the amount projected in CBO’s baseline. The implication is fiscal policy under a Harris presidency is not expected to complicate the Fed’s price stability mandate or improve the US growing debt trajectory. This is neutral for USD and Treasury yields.

USD/JPY fell by about 2% overnight to near 145.20 on broad USD weakness. Japan equity markets are down over 1% undermined by JPY strength. Still, the NIKKEI and TOPIX are up almost 20% from their August 5 low. Japan July CPI print and Bank of Japan (BOJ) Governor Kazuo Ueda parliamentary testimony (both Friday) will offer more clues about the extent of the BOJ tightening cycle.

EUR/USD and GBP/USD are up on broad USD weakness. ECB Governing Council member Olli Rehn speaks in a fire-side chat later this evening (10:30pm London). The recovery in UK housing market activity remains subdued. Rightmove national asking price rose 0.8% y/y in August vs. 0.4% in July.

AUD/USD continues to buck the trend from lower iron ore prices. The RBA’s hawkish guidance is offering AUD support. The Minutes of the RBA August policy meeting is up next (tomorrow, 2:20am London).

USD/CAD is edging lower. But CAD is underperforming most other major currencies on dovish Bank of Canada (BOC) policy guidance. Canada’s July CPI report tomorrow is expected to reinforce the case that more BOC policy rate cuts are in the pipeline. The swaps market is pricing 75bps of total easing by year-end.

 

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