MUFG’s Derek Halpenny highlights that rising US and global bond yields, elevated geopolitical risks and higher energy prices are supporting the US Dollar. He notes that expectations of a possible Federal Reserve rate hike are encouraging further Dollar buying, while the global rates backdrop and the BoJ’s gradual policy normalisation are likely to allow further gains in USD/JPY. The DXY’s previous high at 101.80 is now in sight, with a break above that level providing another bullish signal.

Rising yields and geopolitics back Dollar

"UST bond yields jumped notably yesterday with the OIS market indicating the probability of a rate hike by the Fed next week remains around 35%. Yields in Japan continued to grind higher today even with the underlying core-core nationwide CPI annual increase being slightly weaker than expected at 1.7% in June. However, it is the underlying adjusted measure that excludes temporary distortions from policy changes and other special factors that needs monitoring and that stands at 2.7% in May."

"The US Treasury semi-annual report, released yesterday, did not cite any country for currency manipulation but did reference the undervaluation of the yen noting that “monetary policy normalisation would help anchor inflation expectations and reduce excessive rate volatility”. The US certainly wants the BoJ to hike but a continued slow grind higher in USD/JPY will likely continue given the global rates backdrop due to higher energy prices."

"Yields are also higher in Japan and globally due to the fears of a further escalation in the conflict over the weekend with Axios reporting that President Trump is considering a “massive attack” and that he was “close to making a decision”. That suggests an attack over the weekend is high. The US dollar buying momentum looks likely to continue into the weekend."

"A big attack before the FOMC on Wednesday that sees crude oil prices further higher could result in further positioning for an FOMC hike next week. (we see it as very unlikely)."

"The previous high for DXY at 101.80 is now in sight and a break there would be another bullish sign."

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