ING’s Francesco Pesole notes the Dollar started the week strongly despite lower Oil prices and firmer global equities, helped by hawkish remarks from Federal Reserve officials Austan Goolsbee and Alberto Musalem that supported US front-end rates. He argues near-term risks for the Dollar are skewed higher, with DXY potentially reaching 101.0 before month-end, while the US data calendar stays light.
Fed rhetoric keeps Dollar supported
"The dollar had a strong start to the week despite a decline in oil prices and strong risk sentiment. In our view, part of the move reflected a catch-up to levels seen before Friday’s reported Bank of Japan rate check, which had damaged USD momentum across the board."
"Hawkish Fed commentary was however the clearest driver. Chicago Fed President Austan Goolsbee warned that supply shocks, combined with strong spending and AI-related investment, could keep inflation persistent. He added that the path back to 2% inflation may not be painless."
"Later in the day, St. Louis Fed President Alberto Musalem reinforced the hawkish message, arguing that front-loaded gradual tightening is preferable and that policy remains accommodative. Musalem is seen as one of the more hawkish members and may be among the four officials who projected two additional hikes this year in the dot plot, although he is also a non-voter."
"The comments supported front-end USD rates on a day when Brent briefly slipped below $100/bbl, pulling other G10 rate expectations lower. Fedspeak will continue to have the potential to break the oil-USD relationship during periods of falling energy prices, as the Fed is viewed as being more fundamentally focused on inflation while other developed central banks are seen as more sensitive to oil price dynamics."
"Yesterday’s price action has reinforced our view that near-term risks for the dollar remain skewed to the upside. DXY may be headed to 101.0 already before the end of the month."
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