MUFG’s Lloyd Chan highlights that US Treasury yields have eased only slightly, leaving the broader rates backdrop supportive for the Dollar. Elevated real yields and a “high-for-longer” US rate narrative keep USD demand firm and Asia FX under pressure. Market pricing still reflects a possible Fed hike around October, with limited USD downside unless US data or Fed guidance turn clearly dovish.

Real yields sustain strength

“Since the 18 June FOMC meeting, the global market narrative has shifted in favour of a “high-for-longer” US rates environment, keeping Asia FX under pressure. Under new Fed Chair Kevin Warsh, the central bank has pivoted toward a more hawkish tone, signalling a stronger commitment to containing inflation. This policy shift is being reinforced by incoming data, with core PCE inflation still running above 3% and labour market conditions remaining resilient, pointing to continued macro strength.”

“As such, market pricing for a potential Fed hike around October has remained intact. USD downside likely remains contained unless there is a clear dovish pivot by the Fed or a material deterioration of US macro data.”

“While US Treasury yields have eased slightly in recent sessions, this has done little to alter the broader rates backdrop. Both the US 2-year and 10-year yields remain above 4%. More importantly, real yields (adjusted for breakeven inflation rates) remain elevated, anchoring USD demand.”

“From a strategy perspective, this suggests that even if nominal yields consolidate in the near term, the underlying support for the dollar remains intact.”

“Against this backdrop, most Asia FX have depreciated broadly since the FOMC, reflecting widening swap rate differentials and the persistence of a high-for-longer US rate environment.”

Octalas AI

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