The U.S. dollar held firm near a one-week high against major peers on Friday, with the dollar index at 99.18, as investors awaited Federal Reserve Chair Kevin Warsh's speech at the Jackson Hole symposium. The dollar has risen 0.3% this week, but remains on track for a second straight monthly decline of 0.6% after Treasury Secretary Scott Bessent announced increased buybacks of longer-dated bonds, sparking concerns about a potential debasement of the dollar. Market participants are hoping for clarity on Warsh's approach to monetary policy, inflation, and recent bond market volatility.
Expectations for a Federal Reserve rate hike in September stand at approximately 35%, rising to 75% by December, driven by persistent inflation data. Treasury yields remain elevated, with benchmark U.S. 10-year notes at 4.68% and 30-year Treasury yields at 5.2045%. Analysts at Citi noted that any sign of policy alignment between Warsh and Bessent could reinforce expectations of lower curve volatility and weigh on the USD.
Many analysts, including Luke Tilley of M&T Bank, do not expect Warsh to provide explicit forward guidance on interest rates or a detailed "reaction function." However, some, like Mark Cabana of Bank of America, believe Warsh needs to signal his readiness to raise rates if inflation doesn't moderate, warning that focusing solely on broader structural themes could be interpreted as dovish and lead to a sell-off in long-dated Treasurys, potentially pushing the 30-year yield to 5.5% or higher.
The Jackson Hole speech is seen as a pivotal event for the FX market, with ING strategist Francesco Pesole suggesting that hawkish market pricing and Warsh's speech could lift hike odds and support the DXY near 99.0. Several Fed officials have already voiced concerns about sticky inflation, and Warsh's reluctance to provide forward guidance has been a point of contention among market participants.
