Dollar Wavers Between Oil-Yield Support and Risk Appetite

The dollar traded mixed on Thursday as rising oil prices and Treasury yields offered support while a tech-led rally in equities sapped safe-haven demand. Brent crude regained ground after earlier euphoria over a temporary transit route through the Strait of Hormuz faded, with Iran demanding concessions from Oman and the White House maintaining it favors an economic blockade with no negotiations planned. The resumption of the Brent rally rekindled inflation fears, pushing Treasury yields higher.

If Kevin Warsh’s theory holds, that the debt market can do the Fed’s job, a rise in yields should reduce the need for monetary tightening, while a fall in yields would force the central bank to act. The calculus becomes more layered when the Treasury is added. Scott Bessent wants lower interest rates on government debt, a stance that would add hawkish voices to the FOMC. Investors are waiting for Warsh’s Jackson Hole remarks on Treasuries, the balance sheet, and the Fed’s inflation plans. According to JPMorgan and Morgan Stanley, the Fed Chair may be able to convince markets of its intentions. If he fails, the dollar would come under pressure.

Citrini Research described an alliance between the Fed and the Treasury. The Fed shrinks its balance sheet by selling Treasuries to banks. The Treasury cuts long-term bond issuance, causing their yields to fall. The dollar weakens as a result, a development the White House is said to welcome.

A weaker greenback would be welcomed in Japan. Coordinated intervention by Washington and Tokyo pulled USDJPY away from 40-year highs but did not erase the fundamental drivers, the interest-rate differential between the central banks, high oil prices, and elevated Treasury yields. The dollar is now attempting to return to the ¥160 mark.