US Dollar: Rate differentials support but upside constrained – BBH

Brown Brothers Harriman’s (BBH) Elias Haddad notes that the recent pullback in Oil prices has eased global bond selling and cooled the Dollar rally. Haddad argues the USD can still benefit from widening US-G6 rate differentials, but tightening by other major central banks should limit policy divergence and make it difficult for the Dollar to sustain a move above its June high. Strong foreign demand for US securities partly offsets this constraint.

Dollar supported by rate spreads

"The upswing in crude oil prices stalled on reports that US and Iranian negotiators were exploring a seven-day deal to reopen the Strait of Hormuz. The modest pullback in energy prices eased the global bond sell-off and took some steam out of the USD rally."

"USD can continue to benefit from widening US-G6 interest rate differentials. Still, tightening by other major central banks limits policy divergence with the Fed and suggests USD should struggle to sustain an overshoot of its June high."

"US economic growth outperformance and strong foreign appetite for US securities partly offsets that upside constraint for USD."

"In the twelve months to July, foreign investors accumulated $1754bn of long-term US securities (treasury bonds & notes, corporate bonds, equities, gov’t agency bonds), more than twice the -$743bn US trade deficit. That points to solid underlying demand for USD."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)