UBS Warns of Dollar, Treasury Risks

Strategists at UBS Group are warning that a weakening U.S. labor market, alongside changes at the Federal Reserve Board and the Bureau of Labor Statistics (BLS), could pose downside risks to both the U.S. dollar and Treasury yields.

In a note on Wednesday, UBS Investment Bank strategists wrote that investors have not fully digested the implications of a series of events that began last Friday. The events started with a jobs report showing slowing job growth and culminated with the resignation of Fed Governor Lisa Cook.

“The importance of these developments is that the traditional macro and risk premium factors that have been dollar-negative are now simultaneously in play for the first time since the spring,” the strategists wrote.

They noted that as data points to a slowing U.S. economy, concerns are growing about the political pressures and independence of U.S. institutions. The weaker-than-expected July non-farm payrolls data, along with downward revisions to the previous two months' figures, prompted a shift in market sentiment towards expectations that the Fed will cut interest rates at its next meetings.

CME Group's FedWatch data shows that federal funds futures traders are now pricing in a 95% chance of a 25-basis-point rate cut by the Fed at the September meeting, up from 48% a week ago. Traders anticipate the Fed will cut interest rates by 62 basis points this year.

Minneapolis Fed's Kashkari echoed calls for rate cuts on Wednesday. He said the Fed may need to cut interest rates in the near term in response to a slowing U.S. economy, although it is currently unclear whether tariffs will continue to push inflation higher.

The weak employment data angered the former president, who fired the head of the Bureau of Labor Statistics. He also repeatedly criticized the Fed chair for not cutting interest rates.

“Doubts about the quality and credibility of U.S. economic data are not a good omen for the idea of holding U.S. assets with full exposure to dollar exchange-rate risk,” the strategists wrote.

They added that the Bloomberg Dollar Spot Index, which is down 8% this year, could fall further under the influence of these risks, while currencies such as the euro and the yen are expected to rise.

Further Analysis

The recent developments highlight the complex interplay between economic data, monetary policy, and institutional independence. It's crucial for investors to closely monitor these developments and assess their potential impact on currency and bond markets. Diversification can be key to protecting portfolios from potential risks. Investors might consider international bonds or currencies, but should carefully assess their risk tolerance and investment objectives. It is also important to stay informed about any potential changes to Fed policy which can quickly alter the market landscape.