US Dollar: Policy reality supports resilience – OCBC

The U.S. Dollar remains relatively resilient as investors weigh Treasury buybacks against persistent inflation and a Federal Reserve that still appears focused on controlling price pressures.

OCBC Bank strategists Sim Moh Siong and Christopher Wong believe Treasury buybacks alone are unlikely to produce sustained Dollar weakness unless the Federal Reserve also signals a willingness to help contain U.S. bond yields.

## Treasury buybacks may not be enough to weaken the Dollar

Recent Treasury buyback announcements have raised concerns that U.S. authorities could be trying to reduce pressure on longer-term borrowing costs.

However, OCBC argues that the Dollar would likely need clearer evidence of Federal Reserve support before markets could confidently price a prolonged decline in the currency.

Without Fed cooperation, Treasury actions may improve liquidity in parts of the bond market but may not fundamentally alter the interest-rate outlook that continues to support the Greenback.

## Fed policy remains an important source of support

OCBC sees the Federal Reserve's policy stance as one of the main reasons the Dollar continues to show resilience.

Recent U.S. economic data point to persistent inflation alongside relatively solid growth, reducing the urgency for the Fed to adopt a significantly more accommodative stance.

July core Personal Consumption Expenditures inflation increased 0.2% month-on-month and 3.3% year-on-year.

Although inflation has declined from previous highs, annual price growth remains well above the Federal Reserve's 2% target.

This supports the view that monetary policy may need to remain restrictive for longer.

## Sticky inflation limits scope for easier policy

Persistent inflation makes it more difficult for the Federal Reserve to support efforts aimed at keeping Treasury yields artificially low.

If policymakers eased too aggressively while inflation remained elevated, markets could question the Fed's commitment to price stability.

That could increase inflation expectations and potentially push longer-term yields higher rather than lower.

For this reason, OCBC sees limited scope for strong fiscal and monetary coordination designed specifically to suppress yields.

## Resilient growth also supports the Greenback

The U.S. economy continues to show enough resilience to reduce pressure for immediate monetary easing.

When economic growth remains relatively firm while inflation stays above target, the Federal Reserve has more room to maintain higher interest rates.

Higher U.S. rates can support the Dollar by increasing the relative return available on Dollar-denominated assets.

This backdrop makes it harder for traders to build a strong fundamental case for sustained USD weakness.

## OCBC remains neutral on the U.S. Dollar

Rather than aggressively selling the Dollar after its latest decline, OCBC prefers a neutral stance.

The bank believes current conditions do not justify chasing short-term USD weakness, particularly while inflation remains sticky and Federal Reserve policy retains a hawkish bias.

This means the Dollar could remain volatile without developing a clear long-term direction until markets receive stronger evidence of a change in monetary policy.

## Jackson Hole could reinforce Fed credibility

Attention is now focused on Federal Reserve Chair Kevin Warsh's comments at the Jackson Hole symposium.

Markets will watch closely for signals about how strongly the Fed remains committed to bringing inflation back toward its 2% target.

If Warsh and other officials emphasize inflation control and push back against concerns about Dollar debasement, the Greenback could find renewed support.

A clearly hawkish message could also lift Treasury yields and strengthen expectations that interest rates will remain elevated.

## Debasement concerns remain in focus

Treasury buybacks and concerns over the U.S. fiscal outlook have contributed to a narrative that the Dollar could lose purchasing power over time.

However, OCBC argues that this argument becomes much weaker if the Federal Reserve remains committed to maintaining restrictive policy until inflation is brought under control.

A credible inflation-fighting stance can help preserve confidence in the Dollar even when fiscal concerns remain significant.

## What Dollar traders should watch next

The most important near-term catalyst is the Jackson Hole symposium and any guidance from Kevin Warsh regarding inflation and future monetary policy.

Traders should also monitor U.S. inflation data, Treasury yields, employment figures and economic growth indicators.

A sustained decline in inflation combined with weaker growth could eventually encourage the Fed to ease policy and pressure the Dollar.

However, continued sticky inflation and resilient activity would support OCBC's view that the Greenback can remain relatively firm.

For now, the Dollar's outlook remains balanced, with fiscal concerns creating downside risks but Federal Reserve policy and persistent inflation providing meaningful support.