US Dollar: Warsh rhetoric weakens policy credibility – BBH

Brown Brothers Harriman’s (BBH) Elias Haddad notes the US Dollar (USD) is struggling to recover after the Federal Reserve’s (Fed) hawkish hold, as Chair Kevin Warsh’s tough inflation rhetoric failed to convince markets. The United States (US) yield curve steepened, with lower front-end rate expectations and higher long-end inflation expectations, while Brent Oil is seen staying broadly in a $70–$100 range.

Fed hawkish hold hits Dollar

"USD is struggling to retrace yesterday’s slump. Bond yields are higher across the board underpinned by higher crude oil prices. US equity futures are up slightly supported by Microsoft’s solid earnings."

"We continue to see this as another round of managed escalation keeping Brent crude oil prices within a broad $70 to $100 range."

"USD dropped sharply for two reasons. First, markets unwounded the residual 30% odds of a July hike. Second, Fed Chair Kevin Warsh failed to turn tough inflation rhetoric into a credible policy."

"The US yield curve steepened sharply after Warsh’s remarks. Lower near-term rate expectations pulled down the front end, while higher inflation expectations lifted the long end of the curve."

"He may now find himself in a more consequential battle with markets that can further raise long-term yields, weaken the dollar, and force the Fed into a more painful response."