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Dollar in Demand as Bets on Earlier Fed Action Heat Up

The dollar continued its climb Tuesday, riding on the coattails of rising Treasury yields as investors bet the Federal Reserve’s threshold to begin trimming its monthly bond purchases will be met sooner rather than later.

The U.S. dollar index, which measures the greenback against a trade-weighted basket of six major currencies, rose by 0.15% to 913.08, as U.S. bond yields fell, with the U.S. rates continuing to trend higher, with 10-year above 1.4%.

The Federal Reserve has set the bar of sustainable further progress in the economy that needs to met to begin tapering its $120 monthly purchases of bonds. The labor market is at the heart of the threshold, and now some on Wall Street are betting the economy will be able to rack up enough job gains by year-end.

“We expect a Fed tapering announcement in December 2021,” Morgan Stanley (NYSE:MS) said. “[W]e expect to continue mean the economy can reach recovery benchmarks earlier than we had anticipated.”

The odds of the sooner rather later tapering from the U.S. central bank were boosted after several Fed members including Atlantic Fed President Raphael Bostic and Boston Fed President Eric Rosengren backed earlier action on policy from the Fed.

Rosengren said Monday the Fed should announce in September that it will begin trimming its $120 billion in purchases of Treasury and mortgage bonds “this fall.” While Bostic said he is in the favor of faster tapering than in previous rounds.

“We are well on the road to substantial progress toward our goal,” Bostic said Monday. “My sense is if we are able to continue this for the next month or two I think we would have made the ‘substantial progress’ toward the goal and should be thinking about what our new policy position should be.”

Against the backdrop of growing expectations for a sooner rather later monetary policy tightening, Wall Street continued to bet on further dollar upside, supporting by uptick in U.S. yields.

“Strong US data, back-to-school success, ‘advanced notice’ on Fed tapering, and progress on infrastructure make the US stand out. Stay short UST duration, long the USD,” Morgan Stanley said.

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