UBS House View Daily

Thought of the day

07.08 - Discounting a dollar revival

Better-than-expected non-farm payrolls data offered a bruised US dollar a reprieve on Friday, with the DXY index up 0.76% in its best daily showing this year. The data sent Treasury yields higher too, with the 10-year adding as much as 6bps.

But while supportive for the US economy, the jobs data is unlikely to suffice to push the Federal Reserve in a significantly more hawkish direction.

  • Inflation remains subdued. Five months ago, US inflation was at a five-year high of 2.7%; in June, it rose just 1.6%. The Core PCE measure, a Fed favorite, remains at 1.5% y/y, well below the central bank’s official target of 2%.
  • Wage growth is not picking up. The pace of wage gains has slowed from an annualized 2.9% rate at the end of last year to 2.5% y/y now, where it has remained for four straight months.
  • The Fed remains dovish. In July, Fed Chair Yellen told Congress, “there is, for example, uncertainty about when–and how much–inflation will respond to tightening resource utilization.” The Fed appears in no hurry to increase the pace of monetary tightening (We expect the Fed to start shrinking its balance sheet this autumn and hike rates once more this year).

So we don't expect a major revival in the USD. Against the euro the US currency is now close to our 12-month forecast of 1.20.

Chart of the day

Discounting a dollar revival

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