The dollar is poised to jump with Treasury yields in the coming months as still-elevated inflation will likely push the Federal Reserve toward further policy tightening, says Clifton Hill at Acadian Asset Management.
(Bloomberg) — The dollar is poised to jump with Treasury yields in the coming months as still-elevated inflation will likely push the Federal Reserve toward further policy tightening, says Clifton Hill at Acadian Asset Management.
Hill, a global macro portfolio manager, sees the US currency gaining an additional 5% versus many peers, with the trigger coming as policy makers signal further interest-rate hikes in the leadup to their Oct. 31-Nov. 1 meeting. He’s prepping for that outcome by favoring the greenback against the Australian, New Zealand and Canadian dollars, as well as the yen.
His views on the Fed and the dollar proved prescient earlier this year. In February, he correctly predicted that the yen would fall back toward the 32-year lows it hit in 2022 as the Fed tightened further than many market participants anticipated.
The US currency stabilized on Tuesday, after falling from a six-month high Monday as authorities in Japan and China ramped up support for their currencies. But as Hill sees it, the decline to start the week will amount to a bump in the road as markets reprice the Fed’s path. It’s a chain of events he also expects will push 10-year Treasury yields close to 5%, a level last seen in 2007, from roughly 4.3% now.
“The Fed may have to leave the possibility open of hiking further,” potentially two or three more times, said the money manager, whose firm oversees about $100 billion. “Inflation actually going up away from global central banks’ targets in the fourth quarter would be a game changer for markets.”
Read more: Fed Hikes Risk Dragging Yen Back to 145 Per Dollar, Acadian Says
Traders expect the Fed to stay on hold at a policy meeting next week, and see roughly a 50% chance that it delivers another hike at the following decision Nov. 1, before pivoting to cuts next year. The Fed pushed its benchmark rate to the highest in more than two decades in July to tame inflation.
The dollar gained the past eight weeks, buoyed by the US economy’s resilience relative to other major peers, in particular Europe and China.
US consumer-price index data scheduled for release Wednesday is expected to show inflation pressure reaccelerating, which risks jolting the Treasury market. The CPI is expected to have risen 3.6% in August from a year earlier, from 3.2% in July, even as the core measure — which removes food and energy costs — fell to 4.3%, the median estimate in a Bloomberg survey shows.
Read more: Bond Traders Brace for Risk Inflation Will Fuel Rate-Hike Bets
“Every time that inflation comes down some, markets and economists extrapolate out that it will continue all the way down to 2% in short order,” Hill said. “But we are still well over 4% in US core inflation, and there is a good chance that it stays there, or increases back up this autumn into early next year.”
Hill also anticipates dollar strength versus most emerging markets, with the yuan, South Korean won and Brazilian real likely to lose the most.
He acknowledges that his outlook poses a risk to assets like stocks, which are vulnerable to any uptick in expectations for additional Fed tightening.
But if inflation is proving tough to tackle, policy makers’ “hands are completely tied,” he said. “If inflation is going up, you can’t then all of a sudden cut rates.”
In the “best case,” he said, in which inflation doesn’t accelerate as much as he expects, the Fed refrains from hiking further, and instead stays on hold for most of 2024.
(Updates market movement.)
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