Clifton Hill from Acadian Asset Management anticipates a dollar surge in the coming months, driven by elevated inflation pressures and the potential for further Federal Reserve policy tightening.
He predicts a 5% increase in the US currency against various peers, particularly as policymakers hint at additional interest rate hikes leading up to their October 31-November 1 meeting. Hill is positioning for this by favoring the dollar over the Australian, New Zealand, and Canadian dollars, as well as the yen.
Hill’s earlier predictions about the Fed and the dollar proved accurate, as he correctly forecasted a decline in the yen earlier in the year when the Fed tightened more aggressively than expected.
Although the US currency stabilized after a decline from a six-month high due to support measures for currencies in Japan and China, Hill believes this setback is temporary. He expects markets to reassess the Fed’s trajectory, potentially pushing 10-year Treasury yields close to 5%, a level not seen since 2007, from their current level of approximately 4.3%.
Hill suggests that the Fed may need to keep the possibility of further rate hikes open, possibly two or three more times, especially if inflation continues to rise in the fourth quarter. He notes that such a scenario would be a game changer for the markets.
Currently, traders expect the Fed to maintain its policy at the upcoming meeting, with roughly a 50% chance of another rate hike on November 1, followed by potential rate cuts next year. The Fed raised its benchmark rate to the highest level in more than two decades in July to combat inflation.
The dollar has been strengthening over the past eight weeks due to the relative resilience of the US economy compared to other major economies, notably Europe and China. The upcoming US consumer price index (CPI) data is expected to show renewed inflation pressure, which could impact the Treasury market.
The CPI for August is projected to have risen 3.6% year-on-year, up from 3.2% in July, with the core measure (excluding food and energy costs) at 4.3%, according to a Bloomberg survey. Hill believes that US core inflation, currently well above 4%, is likely to remain at that level or increase in the coming month.