ING’s Francesco Pesole notes the Dollar is drawing support from the US bond market as long-dated yields stabilise, while US-Canada trade tensions and Iran-related sanctions risks complicate the outlook. He argues renewed US-China trade frictions could hurt the Dollar, and sees downside risks dominating, although USD is expected to consolidate into the upcoming Jackson Hole event.

Dollar steadies with bond-led support

“The dollar continues to take cues from the US bond market, with a good session for the back-end allowing the greenback to find some support.”

“CNBC reported yesterday that the Treasury may use its account at the Fed (TGA) to fund its buyback operations for long-dated debt.”

“Our rates colleagues argue that this would not be a big deal for the bond market, as buybacks funded through bill issuance today versus buybacks funded by running down the TGA and issuing bills later are largely equivalent.”

“Any serious revival of the US-China trade spat would be negative for the dollar in our view, mirroring last year’s USD correlation with the issue.”

“The balance of risks for the dollar remains skewed to the downside, but our baseline is for further consolidation into the Jackson Hole risk event later this week.”