MUFG: Dollar set to extend gains as Warsh Fed signals hawkish shift on inflation
MUFG says the dollar posted its best week since the Iran conflict began as hotter-than-expected inflation data, rising yields and the arrival of hawkish Fed chair Kevin Warsh combined to shift market rate expectations.
Summary: MUFG research note.
- The dollar rose 1.4% last week, its largest weekly gain since the outbreak of the Iran conflict in early March
- The move was driven by a toxic mix for bonds: Brent crude up nearly 8%, Hormuz still closed, stronger-than-expected CPI and PPI prints for April, and the transition to new Fed leadership
- Kevin Warsh has begun as Fed chair, though he is yet to be sworn in, temporarily extending Powell's term; Powell stays on as a governor
- Steve Miran is stepping down to accommodate the new leadership structure, with the board of governors seen shifting in a more hawkish direction
- Miran indicated enthusiasm for expected changes under Warsh, including revisions to forward guidance, market communication and balance sheet policy
- MUFG flags Warsh's first public remarks as chair as the key near-term risk event, warning that any hawkish signal on inflation could prompt further rate hike pricing and additional dollar strength
The US dollar recorded its strongest weekly performance since the Iran conflict erupted in early March, rising 1.4% against a backdrop of hotter inflation data, a still-closed Strait of Hormuz and a consequential shift in Federal Reserve leadership, according to MUFG.
The bank's analysts described last week as a damaging combination for bond markets. Brent crude advanced by nearly 8% as the Hormuz closure showed no signs of resolution, while April's CPI and PPI releases both came in above expectations, reinforcing the view that the conflict is already feeding through into US consumer and producer prices. Against that backdrop, the arrival of Kevin Warsh as Fed chair added a further hawkish dimension to a market already reassessing its rate assumptions.
Warsh has not yet been formally sworn in, meaning Jerome Powell's term has been extended on a temporary basis. Powell will remain on the board of governors once the transition is complete. To facilitate the new leadership arrangement, Steve Miran is stepping down from the board, a move that MUFG notes tilts the overall composition of the governors in a more hawkish direction. Miran, in departing, expressed support for the changes expected under Warsh, which are anticipated to include revisions to how the Fed communicates with markets, adjustments to its forward guidance framework, and a rethink of balance sheet policy.
The market's reaction to the combined inflation and leadership shift was sharp. The 2-year Treasury yield jumped 19 basis points over the week, closing above 4% for the first time since June of last year. The interest rate swaps market now fully prices a 25 basis point rate increase by the March 2027 meeting, a notable hawkish repricing that reflects both the inflation data and uncertainty about Warsh's policy instincts.
MUFG identifies Warsh's first public remarks as Fed chair as the single most important near-term event for markets. Any language suggesting heightened concern about inflation risks would be sufficient to accelerate rate hike pricing further and provide additional fuel for dollar strength. That scenario, the bank argues, represents the most immediate upside risk for the currency from current levels.
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The 2-year Treasury yield breaking back above 4% for the first time since last June is a technically significant moment that validates the dollar's renewed bid and signals markets are repricing the Fed's reaction function under Warsh. With a 25bp hike now fully priced by March 2027 in the OIS market, the bar for further dollar upside is relatively low: any hawkish inflection in Warsh's debut public remarks would be sufficient to bring forward that pricing and push yields higher still. For oil, a stronger dollar creates an additional headwind for crude prices even as the Hormuz closure continues to support the supply-side bid.
This article was written by Eamonn Sheridan at investinglive.com.提供 MainLink：Investinglive RSS Breaking News Feed
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