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Us dollar rising yields support risk off tone mufg
Confirmed
In Short: The US Dollar has strengthened ahead of the FOMC meeting, supported by rising bond yields and concerns over inflation and energy prices.
MUFG’s Lee Hardman notes that the US Dollar has strengthened ahead of the FOMC meeting as Fed tightening expectations are repriced higher, with the US Dollar Index recovering to levels seen before the August Treasury buyback announcement.
US bond yields are holding near multi-year highs, and oil-driven inflation risks are supporting the US Dollar while weighing on the Pound–Dollar exchange rate, which is forecast to firm up to 1.3385 by late 2026 and 1.3560 by late 2027.
The Japanese Yen has strengthened against the US Dollar as Bank of Japan policymakers opened the door for a rate hike in September, which would be the highest level in about 31 years and follow a rate hike in June.
Rising oil prices are giving the US Dollar some support, but high beta and emerging market currencies face greater downside risks if bond yields and energy prices continue to climb, according to MUFG.
The upcoming Federal Reserve meeting is expected to raise rates, amid concerns over rising government debt and a global bond sell-off pushing yields to multi-year highs, while energy prices have surged amid the ongoing war with Iran.
What's confirmed
- MUFG’s Lee Hardman notes the US Dollar (USD) has strengthened ahead of the FOMC meeting as Fed tightening expectations are repriced higher.
- The US Dollar Index (DXY) has recovered to levels seen before the August Treasury buyback announcement, with US yields rising sharply.
- MUFG highlights modest FX spillovers so far, but warns high beta and emerging market currencies face greater downside risks if bond yields and energy prices keep climbing.
- It highlights that spillovers from rising bond yields into the FX market have been modest so far." “Similar price action has also been evident amongst emerging market currencies where heat commodity and high-yielding currencies have underperformed such as the Chilean peso, South African rand, Hungarian forint and Mexican peso.
- US bond yields hold near multi-year highs ahead of the FOMC meeting and oil-driven inflation risks, supporting the US Dollar and weighing on the currency pair.
What's still developing
- Quarterly Pound projections against the Dollar are drawn from aggregated bank research, prevailing market expectations, and our Sentiment Survey.
- It would also mean that Fed Chair Kevin Warsh, long viewed as an inflation hawk, may be willing to risk the ire of President Donald Trump, who is threatening to halt trade with America’s key partners if the Fed doesn’t cut rates.