US Dollar May Rise on CPI, Trade Wars and Emerging Markets Stress


  • US Dollar buoyed by upbeat economic data, safety-seeking demand
  • CPI data echoing wage growth uptick may boost Fed outlook further
  • Trade wars, emerging markets jitters might prolong risk aversion

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The US Dollar accelerated higher last week as market sentiment deteriorated and Fed rate hike expectations firmed, speaking to the greenback’s haven and yield appeal (as expected). Emerging market shares and currencies plunged amid worries that a US-led rise in borrowing costs may destabilize several key sovereigns, including Turkey, Brazil and Russia. That offered support from safety-seeking flows.

Meanwhile, ISM data showed faster manufacturing- and service-sector activity growth than economists predicted, setting the stage for fireworks as Augusts’ jobs report hit the wires. Perhaps most critically, the release showed that wage inflation soared to a nine-year high of 2.9 percent unexpectedly (although suspicions were entertained ahead of the release). This bolstered priced-in Fed rate hike bets.

Looking ahead, Augusts’ CPI statistics take top billing on the economic calendar. Consensus forecasts envision a downtick from 2.9 to 2.8 percent. If the spike in wages proves to be indicative however, an upside surprise may be in the cards. That could boost conviction in a December rate increase. As it stands, the futures-implied probability of such an outcome stands at 67 percent, the highest in a month.

Furthermore, potential risk-off catalysts abound. An upshift in the projected Fed tightening cycle may continue to sow discord in emerging market assets. Trade war escalation is a concurrent worry after US President Trump threatened an additional $267 billion in anti-China tariffs to follow the $200 billion top-up still pending deployment. Eurosceptic triumph in upcoming Swedish elections may be another flashpoint.

On balance, this seems supportive for the US currency. Still, while a tectonic shift in the Fed outlook is unlikely without an improbably dramatic data miss, sentiment trends can be fickle. Even a relatively modest win on this front – like Canada’s ascension to a revised NAFTA accord or a Brexit negotiations breakthrough – may eat into the Dollar’s haven-based support. Proceeding with caution seems prudent.

— Written by Ilya Spivak, Sr. Currency Strategist for

To contact Ilya, use the comments section below or @IlyaSpivak on Twitter



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