Dollar holds firm ahead of Trump-Xi meeting

Fed speakers bolster market hawkishness

The US dollar traded mixed yesterday, remaining strong against most of its peers, either by extending gains or holding steady, while it managed to move a little bit higher against all its counterparts today.

It seems that the Fed’s hawkish hike alongside hawkish remarks by policymakers yesterday continued allowing investors to maintain a relatively steep implied rate path. Boston Fed President Susan Collins said yesterday that elevated price pressures demand more restrictive policy for achieving long-term price stability. Richmond Fed President Tom Barkin also appeared hawkish, noting that upside inflation risks are currently outweighing any employment-related downside risks.

Fed Vice Chair Philip Jefferson and New York Fed President John Williams also spoke yesterday, but they did not give any signals relating to the Fed’s future course of action. Jefferson focused on modernizing the Fed’s discount window and Treasury-market liquidity, while William’s message was about the Fed ensuring its policy tools remain effective as market structures evolve.

According to Fed funds futures, investors continue to assign an above-50% chance of a back-to-back rate hike at the October gathering, while they are more than fully pricing in a quarter-point increase by December. Excluding last week’s 25bps hike, a total of 80bps worth of additional rate increases is expected by the end of 2027.

US and Iranian officials hold productive talks

What is worth noting is that investors remained hawkish despite oil prices extending their slide for a fifth straight day on Tuesday. The slide in oil prices may be owed to rising hopes about a potential breakthrough regarding the US-Iran conflict. At the UN General Assembly in New York, US President Donald Trump said that US officials had productive discussions with Iranian representatives, adding to hopes that talks could eventually lead to the resolution of the conflict and thereby the full reopening of the Strait of Hormuz.

Nasdaq hits fresh record high ahead of Trump-Xi meeting

The optimism related to the US-Iran negotiations may have been a positive driver for Wall Street, but not the only one. It seems that the AI sprint is accelerating, and this is evident by the fact that Nasdaq was yesterday’s main gainer, climbing to a fresh record high.

Having said that though, investors may adopt a more cautious stance ahead of tomorrow’s Trump-Xi meeting. The Chinese President will arrive in Washington today and Trump is scheduled to greet him. Thus, market-related headlines may start hitting the wires ahead of the main talks, scheduled to be held on Thursday at the White House.

Yen approaches rate-check level; aussie falls after disappointing PMIs

Elsewhere, the yen is continuing its slide today, with dollar/yen getting closer to the 158.00 zone, near which it was rejected on Friday amid speculation of fresh rate checks by Japanese authorities.

Although last week’s rate increase by the Bank of Japan was unable to add fuel to the yen’s engines, the closer dollar/yen gets to the round figure of 160.00, the bigger the risk of intervention. After all, Japan holds around $1 trillion in foreign exchange reserves, which provides ample liquidity and flexibility for officials to prop up the currency when they judge necessary.

The aussie came under pressure after data showed that Australia’s manufacturing PMI fell into contractionary territory in September, while services growth slowed sharply compared to August. Although a fourth rate hike by the Reserve Bank of Australia is nearly fully priced in for next week, the data raise questions over whether the RBA will have enough room to continue raising rates in the coming months.

More PMI data was out today, with the Eurozone indices beating market expectations but doing little to materially boost the euro. In the UK, the manufacturing PMI beat expectations, but the services index missed its forecast, keeping the composite index below its own estimate. Later in the day, the US flash PMIs for September will be released.