King Dollar Ends Win Streak as Countdown to 'Wildcard' Fed Meeting Begins

King Dollar Ends Win Streak as Countdown to 'Wildcard' Fed Meeting Begins

King Dollar Ends Win Streak as Countdown to 'Wildcard' Fed Meeting Begins © Reuters.

By Yasin Ebrahim – The dollar rose Friday, but remains set to snap a two-week winning streak as investors turned attention to the Federal Reserve’s monetary policy meeting due next week that could prove to be a "wildcard" for U.S. bonds yields, which have been driving up the greenback.

The U.S. dollar index, which measures the greenback against a trade-weighted basket of six major currencies, rose by 0.26% to 91.66, driven by a move higher in U.S. rates as investors bet on stimulus-led recovery.

The backdrop of liquidity from President Joe Biden's $1.9 trillion stimulus package, the ongoing positive economic data, and the greater supply of bonds – to fund the government spending – will likely continue to support rates in the near term, but the Federal Reserve remains a key wildcard, Jefferies (NYSE:JEF) said in a note.

"[W]e do expect the rate move to continue in the very near term. The Fed as ever remains a key wildcard," Jefferies added. "So we do think folks need to watch the price action quite closely here going into next week’s Fed meeting," it added.

The Fed will provide a fresh update on its economic outlook that will likely reflect the faster pace of growth and the transitory inflation pressures, but with the labor market still below pre-pandemic levels, the central bank will stick with its projection on rates to remain near zero through 2023.

The increasing scrutiny over price action in the bond market comes in the wake of a rapid move higher in bond yields, which trade inversely to price, and is more often a boon for the dollar. There are fears the move could signal inflation is at risk of the spiraling of control. Still, the level of concern appears overdone somewhat as real yields are only two basis points.

The press conference that follows the Fed decision was be closely watched after Fed Chairman Jerome Powell at a recent virtual event — hosted by the Wall Street Journal — said the move in rates has caught his attention, but he downplayed the risk of the runaway inflation.

"Bonds sold off after Powell’s WSJ Q&A, pressuring risk assets and lifting the dollar. If the Fed Chair can present a dovish narrative in such a way that US Treasuries avoid a disorderly sell-off, then those currencies exposed to the global business cycle – including the EUR – can probably enjoy some modest gains later in the week," ING said in a note.

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