US Dollar: Hawkish Fed hold may support USD – MUFG

MUFG’s Lloyd Chan expects the Federal Open Market Committee (FOMC) to deliver a hawkish hold, with the Federal Reserve (Fed) keeping rates unchanged while stressing elevated inflation risks. He notes softer recent US data but highlights that markets still price some probability of a July hike. Chan argues this stance should keep US yields and the Dollar supported, reinforcing USD resilience.

Fed stance seen backing Dollar strength

"US macro data surprised on the softer side yesterday. The ADP weekly employment rose 15,000, slightly below market expectations of 16,500. Wholesale inventories held steady at 0.3%mom, below 0.4%mom consensus."

"Consumer sentiment also softened, with the Conference Board's Consumer Confidence Index falling to 90.8 in July from 92.2 in June, missing expectations of 92.4. US 2-year and 10-year yields were about 4bps lower yesterday. Meanwhile, markets have priced in around 34% chance of a 25bps Fed rate hike at the July meeting, though somewhat lower than the 38% being priced in a couple of days ago."

"The FOMC rate decision is coming up next. Our base case is for a hawkish hold, with the Fed likely to keep rates unchanged and emphasized that inflation risks remain high. This could keep US yields and the dollar supported, in turn weighing on Asia FX broadly."

"The balance of risks remains tilted toward USD resilience should the Fed continue to emphasize its high-for-longer policy stance."

"Our analysis suggests that SGD, KRW, and MYR have exhibited the strongest correlation with DXY movements over the past 30 weeks, implying that shifts in Fed expectations, US yields and broad dollar sentiment have been key drivers of these currencies."