US Dollar Forecast: Gaining Ground as ASEAN Weaken, Eyes on Fed Chair Powell

  • US Dollar mostly strengthened versus ASEAN currencies this past week

  • Rising longer-term Treasury yields, idling ASEAN equities key factors

  • ASEAN, Key News Ahead: Singapore CPI, Thailand trade, Fed Chair

US DOLLAR ASEAN WEEKLY RECAP

Last week, the US Dollar saw some strength against ASEAN currencies. It was relatively unchanged against the Singapore Dollar, while gaining ground against the Indonesian Rupiah and Thai Baht slightly. A notable standout was the Philippine Peso, which weakened 0.85% against the Greenback. In fact, USD/PHP rose the most since March, almost one year ago. The MSCI Emerging Markets Index fell about 0.5%.

Over the past 5 trading sessions, global funds sold the most amount of Philippine equities since late January, according to Bloomberg. These capital outflows may have pressured PHP, which can be quite sensitive to them. Meanwhile, the Bank of Indonesia cut its 7-day reverse repo rate to 3.50% from 3.75% prior, as expected. While USD/IDR gained, the central bank reiterated its commitment to upholding the Rupiah.


US DOLLAR, MSCI EMERGING MARKETS INDEX – LAST WEEK’S PERFORMANCE



EXTERNAL EVENT RISK – TREASURIES, FED CHAIR JEROME POWELL

The notable slowdown in ASEAN currency gains this year compared to the majority of 2020 comes amid two key market developments. The first is rising longer-term Treasury yields in the United States. This is a sign that a combination of fiscal stimulus expectations, vaccine rollouts and global growth bets are driving up local inflation expectations. The 10-year breakeven Treasury rate, a market-based gauge of CPI, is near 2018 highs.

Rising rates of return from the US can work to cushion the downside potential in the Greenback. Meanwhile, ASEAN stock market benchmarks are struggling to push into new highs. In fact, they have been consolidating since the US Dollar found a bottom earlier this year – see chart below. Investors may be becoming increasingly hesitant to park capital into riskier assets as government bond yields start offering better returns.

With that in mind, all eyes are on Fed Chair Jerome Powell who will be speaking twice this week. Once at the central bank’s semi-annual monetary policy report to the Senate Banking Committee on Tuesday. The other is during testimony before the Congress House Committee on Financial Services the next day. He may be questioned about bond yields, but may also reiterate the central bank’s dovish policy stance.

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