US Dollar: Event-driven risks shape debasement narrative – MUFG

MUFG’s Derek Halpenny notes the US Dollar is broadly stable as investors focus on US Treasury actions to contain long-term yields and renewed talk of Dollar debasement. He highlights Scott Bessent’s Economic D-Day plan on Iran and Fed Chair Warsh’s Jackson Hole speech as key near-term drivers for Dollar sentiment, with risks skewed to downside.

Dollar sentiment tied to policy risks

"The US dollar is broadly stable at the start of a new week in which the word “debasement” is being used frequently as investors remain focused on the US Treasury and what else it plans to help contain the rise in long-term yields. In Friday’s FX Weekly we asked whether the US dollar debasement trade is back and while we do not expect a repeat of the dollar selling in January (-4% intra-day high-to-low) there are risks that sentiment could deteriorate further. A few events will determine near-term dollar sentiment."

"If the action is seen a credible and severe we would certainly see crude oil bouncing back and the dollar would initially at least strengthen."

"But it is hard to take a view on the dollar on just this event risk given the focus on dollar debasement. Scott Bessent is also due to provide information on fiscal consolidation plans following the UST bond buyback announcement last week. We are sceptical that much will come from that."

"We see the risk skewed to more of the same from Warsh. That could see the long-end of the bond market suffer especially if by then there has been no credible measures announced on fiscal consolidation (likely). If crude oil prices have also risen due to a severe D-Day plan, we may see the 30-year yield break above the 5.34% high set last week."

"US dollar risks are skewed to the downside ahead of this week’s event risks."