28-09-2023 05:37 PM | Source: Yes Securities Ltd
India Stratergy : Dollar Rally - Long in the Tooth by Yes Securities

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Dollar Index Peaking at 108-109

* The US Dollar has been riding on the coattails of a weaker Yen, Euro, and Sterling. Indication of a terminal policy rate from the ECB and BoE and policy divergence of BoJ has resulted in a jump in the Dollar against the basket of currencies. However, the Fed’s policy rate at 5.5% is also very much assumed to be the terminal rate given the downward revision of Core PCE Inflation

* Markets are pricing in a very small probability of further hikes in Fed policy rate, which in our view should result in a peak in US Treasury yields

* If US sovereign yields have risen, yields on German Bunds, Japanese Bonds and UK Gilts have also hit multi-year highs, retaining their spread with US Treasuries

* Bank of Japan has indicated that it will aggressively intervene in FX markets, if USD/JPY breaches 150 mark

* Higher US Yields are just not the consequence of interest rate trajectory but also now a function of higher US Market borrowing and falling foreign ownership of US Treasuries

* Although there is no recession risk, we see the US economy slowing down in early 2024, manifested by the exhaustion of excess household savings and rising debt delinquency rates. The lagged impact of policy rate hikes will be evident in 2024, interest rate changes generally work with a lag of 18 months

* A Higher US dollar amid rising Government Debt and widening Fiscal shortfall is not justifiable

* We see the Dollar Index peaking at the 108-109 mark

Exhibit 1 : Indication of a Pause on the interest rate by the ECB, and BoE and inaction by BoJ has triggered a rally in Dollar Index…

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