The DXY Index depreciated by 0.25% overnight to 99.677, reversing most of Tuesday’s gain. The USD, nevertheless, regained some of its haven appeal amid renewed US military strikes on Iran, reinforced by market pricing a two-thirds chance of a Fed hike at the September 16 FOMC meeting. Risk sentiment weakened, with the S&P 500 falling 0.7% to 7631.47, putting the psychological 7,600 support level within reach. The tech-heavy Nasdaq Composite Index declined 1% to 26,099.77, approaching its own key 26,000 threshold.
Fed Governor Michael Barr signalled he could join his three colleagues who voted for a rate hike in July if inflation failed to subside. The August ISM Manufacturing prices paid sub-index offered little reassurance, holding at 71.1 instead of easing to 70.8. Attention now shifts to tomorrow’s more important ISM Services survey, where the comparable prices paid gauge is expected to edge down to 70 from 70. Together, these indicators will shape expectations for the CPI inflation release on September 11. Consensus expects headline inflation rebounding by 0.4% MoM in August from 0.1% in July, while core inflation is seen holding at 0.2%. Brent crude averaged $88 per barrel in August from $84 in July. It is threatening to break above $95 following the overnight rise of 4.6% on renewed US military strikes against Iran.
The JPY did not buck the broader USD recovery and reversed Monday’s advance. However, the JPY’s decline was cushioned by US Treasury Secretary Scott Bessent lending rare external backing. Bessent advocated further Bank of Japan rate hikes while recasting “Abenomics 2.0” as “Takaichinomics,” portraying it as a more constructive framework centred on sustainable domestic growth. Bessent’s comments were significant given his previous linkage to Japan’s currency interventions to US efforts to contain long-dated Treasury yields. With USD/JPY above the critical 160 threshold, intervention concerns remain elevated.
The CHF was the weakest currency overnight, losing 0.4% against the USD. The market assigned virtually no probability to a rate hike by the Swiss National Bank on September 24. With the policy rate at 0%, OIS pricing points to a tightening only later in 2027. USD/CHF has rebounded above 0.81 after briefly plunging below 0.80 following Bessent’s August 18 announcement of increased bond buybacks. USD/CHF is now approaching the year’s high around 0.82 reached in late July.
While the USD appears supported by Fed-hike expectations ahead of FOMC meeting a fortnight away, we remain wary that the USD is also in a tug-of-war, driven by the US Treasury 30Y yield pushing above Bessent’s seemingly 5.30% pain threshold.
Quote of the Day
“A national debt, if it is not excessive, will be to us a national blessing.”
Alexander Hamilton
Today in history
The US Congress established the Department of Treasury on September 2, 1789.
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