According to MUFG’s Derek Halpenny, the US Dollar is experiencing upward pressure due to a combination of rising US and global bond yields, heightened geopolitical risks, and higher energy prices [1]. The probability of a Federal Reserve rate hike next week remains around 35% as indicated by the OIS market, which is encouraging further Dollar buying [1]. US Treasury bond yields saw a notable increase, while yields in Japan also continued to rise, despite Japan's core-core nationwide CPI annual increase being slightly weaker than expected at 1.7% in June [1]. However, the underlying adjusted measure of Japanese inflation, which excludes temporary distortions, stood at 2.7% in May and is considered more significant for policy monitoring [1].
The US Treasury's semi-annual report, released yesterday, did not cite any country for currency manipulation but did reference the undervaluation of the yen. The report noted that 'monetary policy normalisation would help anchor inflation expectations and reduce excessive rate volatility,' suggesting that the US wants the Bank of Japan to hike rates [1]. Despite this, MUFG expects a continued gradual increase in USD/JPY, supported by the global rates backdrop and higher energy prices [1].
Geopolitical risks are also contributing to higher yields, with fears of further escalation in conflict over the weekend. Axios reported that President Trump is considering a 'massive attack' and is 'close to making a decision,' which suggests the likelihood of an attack over the weekend is high [1]. This has added to US dollar buying momentum, which is expected to continue into the weekend [1].
Halpenny notes that a significant attack before the upcoming FOMC meeting on Wednesday, especially if it pushes crude oil prices higher, could result in further positioning for a potential FOMC rate hike next week, although he considers this scenario very unlikely [1]. The DXY’s previous high at 101.80 is now in sight, and a break above this level would provide another bullish signal for the US Dollar [1].
CONCLUSION
The US Dollar is being supported by rising yields, geopolitical tensions, and higher energy prices, with market participants watching for a potential break above the DXY’s previous high. While the probability of a Fed rate hike remains moderate, ongoing risks and policy signals suggest continued upside momentum for the Dollar in the near term.