- Rising Treasury yields are shifting capital away from stocks and into the US dollar.
- Verbal interventions and expectations of a BoJ rate hike have supported the yen.
The US dollar is gaining ground on increasingly hawkish expectations for Federal Reserve rate hikes, pushing up bond yields as investors dial down expectations for a quick end to the conflict in the Middle East. The Strait of Hormuz is closed and global oil reserves are declining.
has been trading near the upper end of its range since March, with the risk of returning to an uptrend. Against this backdrop, inflation expectations and Treasury bond yields are rising. As a result, stock valuations are changing, corporate costs are rising, and profits are falling. The dollar's retreat from all-time highs is strengthening the dollar.
The market is pricing in a 4.65% yield on the , which is nearly 100 basis points above the Federal Reserve's current rate. The higher the inflation, the higher the risk premium that investors will demand. In such a situation, the Federal Reserve needs to adopt an aggressive tone to reduce yields. Only then will the market's fear of inflation getting out of control subside.
However, Anna Paulson, president of the Atlanta Federal Reserve, insists on keeping rates at their current level and describes current policy as moderately restrictive. Signs of slowing inflation would provide the impetus to return to rate cuts. Unfortunately, these signs are increasingly rare. The US economy would have to face a recession for the Federal Reserve to cut rates.
This makes Kevin Warsh's task of easing monetary policy extremely difficult. Donald Trump has previously stated that he would be disappointed if the new Federal Reserve chair did not cut rates.
The approach of 160 forces the Japanese government to resort once again to verbal intervention. On the sidelines of the G7 finance ministers and central bank governors meeting, Satsuki Katayama said authorities would take bold action if necessary.
Scott Bessent met with Bank of Japan Governor Kazuo Ueda and noted that the strength of the economy allows the Bank of Japan to act decisively. The futures market is pricing in a 77% chance of an overnight rate hike at the June Policy Board meeting, which is supporting the yen.
The FxPro Analyst Team
