Written by Dollar remains soft as Bessent talks buybacks
The US dollar tried to stabilize on Thursday, rebounding against the Swiss franc and the Japanese yen, and halting losses versus the euro. However, it remained on the back foot against the risk linked aussie, kiwi and loonie, while today it is drifting south again versus all its major counterparts.
The greenback’s attempt to stabilize may be owed to the temporary market impact of the US Treasury’s announcement to at least double the size of long-dated government debt repurchases. Indeed, the rally in long-dated Treasury bonds petered out with the 10- and 30-year yields rebounding.
Nonetheless, US Treasury Secretary Bessent said overnight that they could further increase the buybacks in an attempt to stem the sharp rise in yields. Maybe that’s why the dollar resumed its slide today, even as the probability of a September rate hike has modestly increased. According to Fed funds futures, the September hike probability has risen to 35%, while the number of basis points worth of rate increases by the end of 2027 has gone up to 40.
Trump threatens tougher Iran sanctions as ceasefire expires
Perhaps the slight increase in Fed hike bets was due to new hostile rhetoric surrounding the Middle East and the US-Iran tensions. On Monday, the temporary ceasefire between the two nations expired, with neither side appearing willing to resume negotiations about the reopening of the Strait of Hormuz.
Trump noted overnight that “no one” had given Iran a “greater opportunity” to make a deal and that they have failed to do so. He also promised to increase sanctions against the country and warned against countries wanting to provide support to Iran, saying that they will face “tremendous” economic consequences. Treasury Secretary Bessent reiterated that the US would impose tough restrictions on Iran, suggesting that the measures could reduce the need for military action.
Oil stays elevated, gold rallies above $4,500
Oil prices continued moving higher, though the advance has slowed today, perhaps as the continued stalemate is adding to energy supply concerns. However, this did not translate into dollar strength or gold weakness, perhaps as only a serious military escalation could revive serious inflation worries, especially after July’s soft prints.
Gold is extending its rally today as the slide in the dollar, the still-cautious rate hike bets, and the Treasury’s willingness to keep the rally in long-dated yields in check, are reducing the opportunity cost for holding the precious metal.
Gold cleared the key $4,500 zone today and seems to be headed towards the peak of May 29, at around $4,600. A break higher could carry larger bullish implications and perhaps encourage advances towards the peak of May 12 at $4,775.
Yen resumes slide even as BoJ hike bets remain strong
The Japanese yen weakened yesterday, corroborating the notion that dollar/yen traders are willing to resume long positions even after the coordinated US-Japan intervention in the end of July.
Data overnight showed that core inflation accelerated in July, bolstering the case for a rate hike at the upcoming gathering. According to Japan’s Overnight Index Swaps (OIS) there is a strong 67% chance of such a move, while investors are penciling in around 100bps of rate hikes by the end of 2027.
It seems that traders view the Fed-BoJ policy divergence as overstretched. That’s probably why they are willing to stay long in dollar/yen. Indeed, it is difficult to envision an even more hawkish Bank of Japan from here onwards. PM Takaichi wants to bolster growth through increased spending, and to get the money for doing so, she wants interest rates to stay low and make bonds attractive. She could even influence the BoJ’s decision making and strategy by selecting dovish members to take Board positions.
Bond-market risks and geopolitical uncertainty weigh on stocks
With the stress in bond markets showing little signs of letting up, Wall Street closed in the red yesterday, with the Dow Jones losing the most. The hostile rhetoric around the Middle East conflict is not helping either.
Although stock futures are pointing to a higher open today, it seems that investors remain concerned about valuations. The rise in oil prices has yet to translate into renewed inflation fears and rate hike bets, but should the situation worsen, expectations of higher interest rates could further weigh on present values of high-growth tech firms that are valued by discounting their expected cash flows for the quarters and years ahead.
by XM.com
