The US Dollar (USD) retraced some of yesterday’s losses as stock markets stabilized following a sell-off. However, the USD is likely to struggle to gain further upside momentum, as it is currently trading above the level implied by US-G6 2-year bond yield spreads.
Investors are now turning their attention to the upcoming release of the November University of Michigan Sentiment Index, scheduled for 3:00 pm London time (10:00 am New York). The headline figure is expected to come in at 53.0, down from 53.6 in October, and remains well below the long-run average of 84.4. Market watchers should pay close attention to the inflation expectations component of the survey to confirm whether price pressures remain contained, according to BBH FX analysts.
An hour after the sentiment index release, the New York Fed will publish its survey of consumer expectations. Of particular interest will be any further increase in the mean perceived probability of job loss within the next twelve months. Recent data suggests a rise in the unemployment rate, which could heighten concerns about economic strength.
In terms of liquidity, US conditions have returned to normal after briefly tightening late last month. The spread between the tri-party general collateral rate (TGCR) and the interest rate on reserve balances (IORB) has narrowed back to nearly 0 basis points after spiking to +25 basis points on October 31. Under normal circumstances, TGCR should be close to or slightly below the IORB on average.
The recent upward pressure on funding rates has been driven by temporary factors, including fiscal flows and the US Treasury’s increased cash balance at the New York Fed (TGA balance) partly due to the government shutdown. Jorge Aseff, Portfolio Manager of Inflation-Indexed Fixed Income, notes that while brief spikes in the funding market may occur in the near term, the overall situation is not alarming.
Several factors support this outlook:
– The Federal Reserve plans to end the reduction of its aggregate securities holdings on December 1, ensuring ample reserves remain.
– The Fed has strong tools, such as the discount window and the Standing Repo Facility, to cap money market rates and provide additional liquidity if needed.
On the policy front, the “growing chorus” of Fed officials advocating against rapid rate cuts was vocal yesterday. St. Louis Fed President Alberto Musalem (FOMC voter) and Cleveland Fed President Beth Hammack (2026 FOMC voter) emphasized the importance of resisting above-target inflation. Chicago Fed President Austan Goolsbee (FOMC voter) urged caution, advising to “be a little careful and slow down” on easing amid limited inflation data during the government shutdown.
Looking ahead, Fed Vice Chair Philip Jefferson will speak on AI and the economy at 12:00 pm London time (7:00 am New York), followed by Fed Governor Stephen Miran, who will discuss stablecoins and monetary policy at 8:00 pm London time (3:00 pm New York). These speeches will be closely monitored for clues on the Fed’s outlook and policy path.
https://bitcoinethereumnews.com/finance/usd-retraces-losses-as-stocks-stabilize-bbh/