The US dollar is trading in mixed fashion as rising oil prices and Treasury yields lend it support while a Nvidia-led rally on the S&P 500 curbs safe-haven demand. Traders are holding back ahead of Kevin Warsh's Jackson Hole speech, and a reported alliance between the Fed and the Treasury points to further dollar weakness.
The US dollar is trading in mixed fashion, supported by rising oil prices and Treasury yields, while a rally on the S&P 500 led by Nvidia has boosted risk appetite and cut demand for the currency as a safe haven. Investors are in no hurry ahead of Kevin Warsh's speech at Jackson Hole.
Oil optimism over Hormuz fades
The early relief over a temporary transit route through the Strait of Hormuz is fading. Iran is demanding major concessions from Oman, while the US is criticizing Oman for what it has already given up. Still, the White House maintains that no negotiations with Tehran are underway or planned, and it instead favors an economic blockade.
The renewed rally in Brent crude is reigniting fears of accelerating inflation and driving up Treasury yields. If Warsh's own theory holds — that the debt market can do the Fed's job for it — a rise in yields would reduce the likelihood of tightening, while a fall in yields could push the Fed toward tightening instead.
Warsh's Jackson Hole test
Investors are awaiting Warsh's clarification on Treasuries, the balance sheet, and the Fed's plans for inflation. According to JPMorgan and Morgan Stanley, Warsh may be able to convince markets on these points; if he fails, the dollar will come under pressure. Treasury Secretary Scott Bessent, meanwhile, is keen to see a cut in interest rates on debt instruments, a shift that would add to the number of hawks on the FOMC.
A Fed-Treasury alliance, and the yen
Citrini Research describes an alliance between the Fed and the Treasury: the Fed is reducing its balance sheet by selling Treasuries to banks, while the Treasury is cutting back on long-term bond issuance, pulling those yields down. Together, these moves are weakening the dollar, in line with the White House's plans.
A weaker dollar would also be welcomed in Japan. Coordinated intervention by Washington and Tokyo has pulled USD/JPY away from 40-year highs, though it hasn't erased the interest-rate gap between the two central banks, elevated oil prices, or Treasury yields.
The dollar is now attempting to work its way back toward the ¥160 mark.
Source: ActionForex
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