Unlike equities, FX carry strategies tend to perform better in high-inflation, rising-rate environments. This is because FX carry currently has a pro-inflation bias, making it a resilient strategy amidst stagflationary fears, which the speakers believe are currently overblown.
A "dollar discount" versus fair value widened significantly after the July FOMC meeting raised credibility concerns. The Fed's recent hawkish delivery helps restore that credibility, potentially unshackling the dollar to rally and close this valuation gap, providing a new baseline of support.
Contrary to the belief that the first rate hike marks the dollar's peak, analysis over 30 years shows multiple instances where the dollar appreciated post-hike. This suggests the current cycle may have further room to run, especially given the dollar's relative underperformance leading up to this point.
The factor that could force the Fed into a more aggressive tightening cycle and spark another major dollar rally is evidence of demand-side inflation. This would be characterized by a tight labor market and strong growth, moving beyond supply-side issues that central banks have less control over.
The dissent votes on a rate hike from two members appointed by the Takahiti administration are a key political signal. It suggests the government still favors reflationary policies and opposes an accelerated pace of rate hikes, potentially reigniting concerns that the BOJ will fall "behind the curve" and weaken the yen.
The US's choice to intervene in Euro-Yen, not Dollar-Yen, signals its top priority is US Treasury market stability. Selling the dollar directly could be interpreted as tolerance for a weaker dollar, risking a sell-off in US Treasuries by foreign holders—a risk the US Treasury Secretary aims to avoid.