US Dollar Index: Upside risks stay supported – ING

§ 01 Executive Snapshot

• What: The US Dollar Index (DXY) remains supported despite soft June jobs data and low G7 FX volatility.
• Who: ING’s Chris Turner, Federal Reserve (Fed), Bank of Japan.
• Why it matters: The stability of the USD amidst economic uncertainty and potential Fed tightening impacts global currency markets and investment strategies.

§ 02 Key Developments

• The US Dollar has held up after soft jobs data, with G7 FX volatility low, encouraging carry trades.
• One-week dollar deposit rates are in the upper half of the G10 range, supporting short dollar positions.
• Money markets are pricing 31bp of Federal Reserve tightening this year, down from 43bp seen last month.

§ 03 Strategic Context

• The Fed's commitment to restoring price stability is emphasized after missing its target for five years, suggesting potential rate hikes.
• The dollar's resilience against significant Japanese FX intervention highlights careful management of FX reserves by Tokyo.

§ 04 Strategic Implications

• Immediate consequences include a potential upward drift of the DXY supported by solid market narratives despite weak economic data.
• Long-term implications could see sustained interest in carry trades and foreign exchange strategies influenced by Fed policies.

§ 05 Risks & Constraints

• Potential risks include regulatory actions or shifts in monetary policy that could affect dollar strength.
• Competition from other currencies and geopolitical factors may pose challenges to the dollar's stability.

§ 06 Watchlist / Forward Signals

• Upcoming FOMC minutes under Chair Kevin Warsh may provide insights into future Fed policy direction.
• Focus on US June ISM services numbers for indications of economic activity and inflation trends.