Overnight, multiple factors drove the U.S. dollar index higher.
First, Federal Reserve Governor Michael Barr said in a speech that inflation remains above our 2% target and has not yet clearly and timely moved back toward the target, and we need to readjust monetary policy to reflect the balance of risks facing our mandate goals.
This is a relatively clear pro-rate-hike argument rarely seen among Fed governors, indicating that Barr and Fed Chairman Warsh share the same view: inflation must not only trend lower, but also reach the set target.
On the other hand, the United States rejected Iran's proposal to open the Strait of Hormuz.
Originally, Iran's foreign minister and the U.S. special envoy might have met during the United Nations General Assembly, leading the market to believe that tensions between the U.S. and Iran could ease.
The U.S. stance once again lowered market expectations, causing overnight U.S. crude oil WTI to touch a high of $92.43.
High oil prices are likely to lead to high inflation, and the threat of high inflation will prompt the Federal Reserve to adopt a preventive rate-hike policy.
The White House is preparing a 90-day diesel export ban. Although U.S. Energy Secretary Wright is pessimistic about it, it can highlight the U.S. inventory crisis in refined products.
As the low-volume state of the Strait of Hormuz continues, along with Ukraine's attacks on Russian refineries, the tight supply situation in the refined products market may continue, which indirectly boosts the U.S. dollar index.
Chart 1, CEM FedWatch forecast of Fed rate hike probability - ATFX
According to CEM FedWatch forecasts, the probability of a 25-basis-point Fed rate hike in October is 55.4%, the probability of a rate hike in December is 47.1%, and the probability of a 50-basis-point rate hike before January next year is 44.4%.
From CEM's forecasts, the Fed may raise rates once more before the end of the year, but the probability is not high.
However, after yesterday's series of bullish factors, market participants' expectations for a Fed rate hike may move further forward.
In terms of U.S. Treasury yields, the 4W Treasury yield is 3.88%, the 8W Treasury yield is 4.00%, and the 3M Treasury yield is 4.14%, rising in sequence, but the yields of these three maturities are all less than 25 basis points from the current 4% upper limit of the federal funds rate, which may mean that the probability of another Fed rate hike before the end of the year is relatively low.
Chart 2, overlay of the U.S. dollar index and gold trends - ATFX
Over the past month, the U.S. dollar index and gold trends have shown a high-probability inverse relationship.
On one hand, the rise in the U.S. dollar index is driven by rate-hike expectations, while gold's disadvantage as a non-yielding asset has been amplified.
On the other hand, expectations for gold to replace the dollar as an international reserve currency are fading.
Before the U.S.-Iran conflict, Trump's arrogant attitude toward European allies had led central banks of various countries to reduce the share of dollar reserves and substantially increase gold holdings.
However, after the U.S.-Iran conflict broke out, European countries' security dependence issues were exposed, and the dollar once again took the dominant position in the reserve asset market.
In the long run, the U.S. macroeconomy may continue to recover because of high oil prices and rising international influence. A typical economic indicator is the unemployment rate, which has reached 4.1%, a new low since mid-2024.
As global asset pricing benchmarks, the dollar and U.S. Treasuries may continue to benefit from this economic recovery.
ATFX Risk Warning, Disclaimer, and Special Statement: Markets carry risks, and investment requires caution. The above content represents only the analyst's personal views and does not constitute any operational advice. Please do not treat this report as the sole reference basis. At different times, the analyst's views may change, and updated content will not be notified separately.
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