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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 the US Dollar 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 that while modest FX spillovers have been observed so far, high beta and emerging market currencies face greater downside risks if bond yields and energy prices continue to climb.
According to reports, the rise in US bond yields, bolstered by oil-driven inflation fears, continues to weigh on the non-yielding bullion. The US Dollar stands firm near a two-week high as the anticipated Fed rate hike and oil-driven inflation fears push US bond yields to a multi-year high. The Japanese Yen (JPY) strengthens against the US Dollar (USD) as Bank of Japan (BoJ) policymakers opened the door for a rate hike in September, following a rate hike in June.
The Australian Dollar loses 0.11% against the Greenback on Tuesday as risk appetite remains negative amid calls from AI company CEOs to slow development, while the FOMC monetary policy meeting looms. Escalating Middle East tensions also benefit the safe-haven US Dollar and weigh on the risk-sensitive Australian Dollar. The US Dollar/JPY climbs to a fresh one-week high during the Asian session on Wednesday amid a bullish US Dollar.
Meanwhile, the Pound to Dollar exchange rate outlook summary indicates that GBP/USD looks firmer, with projections suggesting it will be at 1.3385 late 2026, then 1.3438 early 2027, and by 1.3560 late 2027. In one month, the Pound–Dollar exchange rate is forecast to be at 1.3402, using a time-adjusted path to projected quarter-end levels. In three months, the Pound–Dollar exchange rate is expected to be at 1.3434.
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.
- Quarterly Pound projections against the Dollar are drawn from aggregated bank research, prevailing market expectations, and our Sentiment Survey.
- Pound to Dollar exchange rate outlook summary: GBP/USD looks firmer — 1.3385 late 2026, then 1.3438 early 2027, by 1.3560 late 2027.
- In one month the Pound–Dollar exchange rate is forecast to be at 1.3402, using a time-adjusted path to projected quarter-end levels.
What's still developing
- The move would raise the interest rate to its highest level in about 31 years and follow a rate hike in June, as the Japanese central bank seeks to address the risk of prices rising more than expected amid higher crude oil prices and a weak JPY.
- Ahead of the upcoming Federal Reserve meeting, stubborn inflation, rising Treasury yields and signals from other central banks have all raised the prospect of a rate hike, which economists say is now all but certain.
- The meeting comes amid recent concerns over rising government debt, with a global bond sell-off pushing yields to multi-year highs, while energy prices have surged amid the ongoing war with Iran.
- On one hand, rising oil prices are giving the currency some support.
- The rise in government bond yields is also being driven by competition from corporate bonds that are driving the artificial intelligence boom and concerns that governments are running unsustainable debts.
- 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.