Hawkish Fed-speak stabilises the dollar

The dollar has recouped a bit of ground this week as Treasury yields have stabilised and the rally in risky assets has stalled, but the greenback remains well below its late September peak. As we suggested that they might, Fed officials have pushed back against renewed hopes of an imminent policy pivot. Uber-hawk James Bullard even suggested that the fed funds rate may need to rise well above the ~5% peak now discounted in money markets. But this push back has so far had only limited effect, perhaps in part because this week’s economic data provided some further support to hopes of a soft landing in the US economy. The release of the minutes from the November FOMC meeting on Wednesday (on the eve of the Thanksgiving holiday) will provide the next test for the pivot narrative. Given how far US bond yields and the dollar have dropped in the past couple of weeks, we think there is a good chance that they rebound if the minutes are in line with the recent hawkish language from FOMC members.