US Dollar Index: Upside risks stay supported – ING

ING’s Chris Turner notes the Dollar (USD) has held up after soft June jobs data, with G7 FX volatility low and carry trades attractive as one-week Dollar deposit rates sit in the upper G10 range. He highlights hawkish FOMC minutes under Kevin Warsh as a key support, sees USD/JPY grinding higher with intervention risks, and expects US Dollar Index (DXY) support at 100.60 to hold.

Hawkish Fed minutes and firm DXY

"US markets are reopening after a long weekend, and FX markets are relatively quiet. G7 FX volatility is close to the lower end of long-term ranges and will be encouraging more interest in carry trades as we head into the heart of summer. Here, one-week dollar deposit rates are in the top half of the G10 table and are a reminder that short dollar positions need to be backed up by a strong story, which is simply not there at the moment."

"Additionally, last week's soft US jobs data release has not done too much damage to the dollar, where short-dated US rates have largely held onto their increase from April. Money markets are now pricing 31bp of Federal Reserve tightening this year versus the peak hawkishness seen late last month of 43bp of tightening. On the subject of the Fed, this Wednesday will see the first set of FOMC minutes released under Chair Kevin Warsh's leadership."

"However, the core message should be a hawkish one, where the Fed is committed to restoring price stability after missing its target five years in a row, and some (or many) members could see the Fed's next move as a rate hike."

"At the same time, the dollar seems to have dodged the bullet of large-scale Japanese FX intervention. USD/JPY is already back at 162 after a no-show from the Bank of Japan in holiday-thinned conditions last week. This could be a reminder that Tokyo wants to use its finite FX reserves cautiously. DXY support at 100.60 should hold today, with a bias for an upwards drift."

"For today, the focus will be on the US June ISM services numbers, where activity should remain consistent with 2% US growth, but the prices paid component should come off its four-year high."