US Dollar: Yield support erodes on weaker inflation – DBS

DBS Group Research economist Philip Wee notes that softer US CPI and labour data kept DXY locked in a 99.4–100.1 range after the USD/JPY sell-off linked to joint US-Japan interventions. Markets sharply reduced the implied probability of a September Federal Reserve hike. A widening US budget deficit and weaker fiscal position are seen as undermining the yield advantage of US bonds and, by extension, the Dollar.

DXY capped as fiscal risks grow

"US CPI inflation came in very much in line with market expectations, not strong enough or weak enough to break the DXY Index out of its lower 99.4-100.1 range set after USD/JPY’s sell-off from the joint US-Japan interventions."

"The markets reduced the probability of a September Fed hike to 40% overnight from 72% at the end of July, driven by last Friday's negative nonfarm payrolls and slower CPI inflation readings."

"With average hourly earnings modestly lower, tracking core inflation amid a softer-than-expected labour market, Fed officials will likely be less concerned about a repeat of second-round effects of inflation that emerged after Covid 19."

"America’s weakened fiscal position erodes the yield advantage of US bonds supporting the USD."