The Dollar: All Eyes on Jackson Hole

• Markets are looking to Kevin Warsh for clues on inflation and Treasury yields.
• Coordination between the Fed and the Treasury will weaken the USD.

The US dollar has shown mixed performance against a backdrop of rising oil prices and Treasury yields, which have provided support. On the other hand, the S&P rally, led by NVIDIA, has boosted global risk appetite and reduced demand for the greenback as a safe-haven asset. Investors are in no hurry ahead of Kevin Warsh’s speech at Jackson Hole.

The oil market’s euphoria over the emergence of a temporary transit route through the Strait of Hormuz is gradually fading. Iran is demanding major concessions from Oman, whilst the US is criticising Oman for what it has already done. At the same time, the White House maintains that no negotiations with Tehran are taking place, nor are any planned, favouring an economic blockade.

The resumption of the Brent rally is reigniting fears of accelerating inflation and driving up Treasury bond yields. It is interesting to note that, if Kevin Warsh’s theory is to be believed – namely, that the debt market can do the Fed’s job for it – then a rise in Treasury yields should reduce the likelihood of monetary tightening. Conversely, a fall in yields could prompt the Federal Reserve to tighten monetary policy.

The situation becomes even more complicated if the Treasury is added to this chain. Scott Bessent is keen to see a cut in interest rates on debt instruments, which would increase the number of ‘hawks’ on the FOMC. Investors are awaiting clarification from Kevin Warsh on issues related to Treasuries and the balance sheet, as well as the Fed’s intentions regarding inflation. According to JPMorgan and Morgan Stanley, the Fed Chair may be able to convince markets of this. If he fails to do so, the US dollar will come under pressure.

Citrini Research speaks of an alliance between the Fed and the Treasury. The Fed is reducing its balance sheet by selling Treasuries to banks. The Treasury is cutting back on the issuance of long-term bonds, causing their yields to fall. At the same time, the US dollar is weakening, which is part of the White House’s plans.

A fall in the greenback will be welcomed in Japan. Coordinated currency intervention by Washington and Tokyo has pulled the USDJPY away from 40-year highs. Still, it has not eliminated the fundamental differences – the interest-rate differential between the central banks, high oil prices, and Treasury yields. As a result, the dollar is attempting to return to the ¥160 mark.

The FxPro Analyst Team