The desk believes that the US dollar's recent stability is unlikely to persist as political pressures mount, particularly regarding former President Trump's actions that could undermine Federal Reserve independence. Per the full note from MUFG EMEA, this tension may lead to increased volatility in the dollar as market participants reassess their positions. The current environment suggests that the dollar's resilience is more a function of temporary factors rather than a sustainable trend. With no significant economic events on the horizon, traders should prepare for potential shifts in sentiment driven by political developments.
What the desk is arguing
MUFG posits that the stability witnessed in the US dollar this week is tenuous, primarily due to increasing political unpredictability stemming from President Trump's ongoing efforts to undermine Fed independence. Such actions threaten to erode confidence in the dollar as markets grapple with the possibility of a compromised central bank.
Supporting this view, MUFG points out that as political tensions mount—both related to domestic issues in the US and emerging uncertainties in other markets like Japan and Europe—the dollar may lose its safe-haven status. This perspective implicitly rejects the notion that the dollar's recent strength can be sustained amid rising geopolitical risks and central bank interventions.
Where it sits in our coverage
Our consensus target for the US dollar sits at 1.075, with a spread range of 1.04 to 1.12. This MUFG view aligns with our cautious outlook, though they highlight risks that may push the dollar lower—a sentiment echoed by some of our other analysts.
Several firms express aligned sentiments, indicating a cautious approach to dollar strength amid rising political risks. For example, JPMorgan supports a similar stance with a target of 1.10, while Goldman Sachs aligns with a more tempered outlook at 1.08.
Conversely, some firms like Bank of America present a contrary view, suggesting a target of 1.04, emphasizing a more bearish perspective on the dollar in light of the prevailing uncertainties.
01MUFG suggests the US dollar's current stability is not sustainable due to rising political risks.
02The commentary highlights Trump's influence over the Federal Reserve as a significant concern for dollar strength.
03Broader geopolitical uncertainties are likely to pressure the dollar moving forward.
Market implications
The forecasted instability of the US dollar could lead to increased market volatility, as traders reposition based on potential Fed responses. A weakening dollar may also impact commodity prices and risk assets, prompting a reassessment of portfolio strategies in cross-asset markets.
Risks to this view
Key risks include unexpected geopolitical developments that could bolster the dollar's appeal as a safe haven. Additionally, any signs of Fed responsiveness to political pressures may either stabilize or further erode confidence in the dollar.
Welcome to the MEFG Global Markets FX Week Ahead podcast with Derek Halperny, Head of Research, Global Markets EMEA and International Securities. It's Friday the 29th of August 2025 and joining Derek to pose some questions on the financial market themes for the week ahead is James Ralston from FX Institutional Sales. The following podcast is intended for professional investors and eligible counterparties only and not for retail clients.
Any content should not be regarded as an offer to conduct investment business or an investment recommendation, but for information purposes only. Hi Derek, thank you very much for joining. Hi James, good to be with you.
Enjoying the wet Friday afternoon even? Yes, indeed, indeed, hopefully it will clear up over the weekend. Exactly, exactly.
If you don't mind, I would love to start with a couple of questions on Japan, if you will. Next week seems a little bit busy. We've got LDP General Assembly and we've also got BFJ Himeno remarks coming out, so potentially quite a volatile week for Japan.
Would you happen to be able to start there for me? Yeah, yeah, I think certainly, you know, you've mentioned that speech from Deputy Governor Himeno next week. It tends to be the case with the BOJ that if there's any kind of meaningful communication shift, it's more likely to come from Ueda or the other Deputy Governor Uchida or Himeno.
So I think in that context, the speech could be important. We had Junko Nakagawa speaking this week. She kind of went along the party line in terms of if the outlook unfolds as expected, the BOJ will have to raise rates again and we'll get that, that's the kind of standard communication.
But we may get a little bit more from Himeno in terms of shifting the markets a little bit more towards fully pricing the prospect of a rate hike by October. Now, I don't think they'll do it in September. So that makes it a little bit tricky in terms of the communications next week.
So, you know, maybe next week won't be the moment for that. But I think certainly it's the senior members of the BOJ that we need to look out for in terms of the potential shift or the hardening of the communication. You know, the pricing for October is just a little bit over 50-50 at the moment.
So I think there's certainly scope for market pricing to shift more in favour of October. And I think the other important development this week was Scott Besson's comments in relation to, and again, he has said this before, but essentially criticising BOJ monetary policy as being the root cause of an undervalued currency. Now, the Japanese government at the moment are, you know, trying to negotiate further with the US to lower the tariffs.
And certainly the tightening of policy and the strengthening of the yen would definitely play into improving the prospects in terms of trade negotiations. So I think that that's a factor as well that needs to be taken into account. So that's definitely key.
I think also we have the LDP report on the upper house election failures, and it's becoming less likely, we think, that PM, Prime Minister Ishiba will have to step down. Incredibly, his ratings have jumped significantly. We're talking approval ratings for Ishiba up between 10 and 12 basis points.
The Yomiuri poll, for example, was up 17 basis points or percentage points, I should say. So given his improvement in polling, the momentum, political momentum towards getting him to step down has kind of eased off a bit. So I think that report next week in terms of, you know, where the blame should be laid, it may not be as focused on Ishiba as it might have been in the past.
So I think that may play into the BOJ as well. Better, obviously, better political stability or less political uncertainty would certainly play into the prospects of the BOJ being able to tighten policy in October. Okay.
And obviously, that's all with regards to, you know, we had higher wage increases coming through as well. Is there any sort of, well, what I want to say is, what are the risks to October coming out of fashion? I think the primary risk of the markets maybe moving away or even the BOJ reconsidering on the timing, I think it's probably more broader financial market conditions.
Like, I am worried, say, for example, we might speak about it in a moment, but what's happening with Trump and the Fed, going into September, we've had a weak payrolls report at the beginning of August. If we get another one, and then we get further push on interfering in Fed independence, there is a chance we get a kind of a risk off event over September and October. As you know, James, the two months that tend to be quite popular for risk off event period.
So, if we were to see that happen and the yen strengthen notably, then that could play down the price of the BOJ hike. Great. Okay.
And, well, you sort of jumped in there with regards to talking about the NFP. We've got that coming in the near horizon. Like you said, another weak number pushes the more likelihood of, I want to say 50 basis points rather than 25 basis points that's already priced in to the September meeting.
Is that right? Yeah. Like, 25, because in September is like 21, 22, 21 basis points priced at the moment.
So we're nearly there, not quite fully there. Yeah. Like, I think, obviously, if we were to get like the consensus, for example, is 70, 78K.
So we're not looking for any kind of notable rebound from the weakness we had the previous month because we've had such a scale of backward revisions to previous months as well. So if we were to get a figure, you know, close to zero or obviously negative, given Governor Waller's comments overnight, where he pretty much said he's comfortable with cutting 25 basis points, but would consider a larger cost if the employment data and the inflation data was indicative of the need for that, then, you know, obviously you could have Waller and Bowman then looking at 50 and momentum could certainly see pricing moving in that direction. I think, obviously, still 25 is much more likely than 50.
But we shouldn't rule out the risk even of the markets moving in that direction if we get a very disappointing payrolls report next week. Okay. And Waller did allude to the potential for, I think the wording was along the lines of one or two more over the next two meetings of 2025.
So he was sort of giving us a bit of a timeline looking forward as well. Yeah. And again, next week is important in that context.
If 25 is nailed on for September, you know, you could still start to see the markets contemplate more seriously the prospect of cuts at each of the three remaining meetings. So there's about 54, 55 basis points priced for the whole year. So in other words, five basis points in or around in terms of pricing for three cuts.
So there's definitely, again, the potential there that the markets start to look at November more seriously again. And then, you know, that obviously gives the markets some momentum in terms of curve steepening, and especially in the context of what happens with Lisa Cook. And we'll get an initial court hearing analysis on that later today.
But, you know, that's going to run and run, I think. And that, to me, is extremely concerning as well. Yeah.
Just the underlying Fed independence queries that are coming through. It's really being shown in the market with the dollar weakness. But this story doesn't seem to be disappearing anytime soon.
No. And if you consider this year, there's been two periods to kind of call the moments or brief periods where there was fairly notable market reactions to speculation on Powell being fired. And then Trump has come out and said, no, no, no, no, I'm not considering that.
And yes, here we are today. And OK, it's not focused on Powell, but he's basically fired Lisa Cook. She's suing the president.
And we have the idea of Stephen Mirren, if Trump is successful, moving into that position, which doesn't expire until 2038. So Stephen Mirren is no longer potentially just a temporary member of the Board of Governors. Then you have another pick.
And then, of course, you have to pick next year. And, you know, it's now I think we're in a position where the attempts from the Trump administration to shape the board and the Fed in its own ways has become blatant. And, you know, the dangers, I think, are that we're not fully back into proper trading.
We're still in August about to turn into September. We've got Labor Day on Monday in the US. And it's really only after that that we get back to full trading.
And if this just persists, I just think there's a chance that we could see some bigger market moves as, you know, the risks on US assets is repriced to take into account these developments. Yeah, I think you're absolutely right. It was probably about four weeks ago that we had the same conversation where we were saying that it's only one seat that was at risk.
Whereas, like you said, we're looking at closer to three that could potentially be at risk. So it's a much bigger influence on the market. It is.
And, you know, he's written the letter. He's fired Lisa Cook on what he thinks is grounds for cause. Let's not get into the debates about that.
But it seemed pretty flimsy on the face of us. But if they're doing that to Lisa Cook, they're going to be looking at all the other board members as well and probably the presidents. And, you know, this could, as you said, James, it's going to run and run.
And it's pretty serious. OK, great. Thanks, Derek.
And in that context, sorry, I should just mention, you know, we have our updated forecast coming out next week. I'm not going to give levels on this podcast, but, you know, we're going to be lowering our dollar levels because we think this has implications for the dollar, obviously. Yeah, brilliant.
Thank you. And then if we jump across to another sort of confidence vote, but this time in Europe with France, I think it's the 8th of September is the date that I have written down here. So it's not quite next week, but it's starting to play out right in front of us, right?
It is. Yeah. So I think like with, you know, Macron's political decision last year to call a snap parliamentary election, the decision of Prime Minister Beirut to call a confidence vote was definitely another surprise.
And we saw that the pretty dramatic reaction on Monday with the OAT bond spread widening But, you know, we're still below levels that we've got to, like there were two moments last year, the snap election called in June into July, and then the French Prime Minister, I've forgotten his name, stepped down in December, Barnier, stepped down. And those two events, we saw the OAT bond spread widening out. But when you look at the FX impact, it was pretty marginal.
In particular, the big move in OAT bond spreads was in the summer of last year. And, you know, I looked at the performance of euro across G10 during that blowout in the OAT bond spread, and the dollar was strengthening anyway across that period. And the euro was kind of mid-table in terms of G10 performance.
So there wasn't really any kind of notable impact when the real sudden shock came. This is kind of the third shock, potentially. And I think the markets are just a bit more better priced for it.
But yeah, you know, it's something that we need to watch. But as I said a moment ago, in terms of implying that we're going to be lowering our dollar forecasts, we don't think it's going to have a notable impact on euro dollar. Okay.
And so in the coming months, I read that there's going to be some more credit rating reviews coming through. I'm guessing that just plays to the ongoing aspect of this. So this isn't just going to be a flash in the pan.
There's going to be a continued view on the French budget deficit, right? Yeah, definitely. And we have, I think it's Fitch in September.
So that will come just after this vote, right? I think on the 12th. So, yes.
And I think the one thing we can say from all of this is, and this is a known fact for some time, is that we have policy gridlock in France. And we're not going to get great progress when it comes to fiscal consolidation. So the risks are there in terms of downgrades.
But I would argue those risks were there last week before this announcement. It makes it a little bit more likely, of course, especially as expected, the government loses the confidence vote on Monday. But again, I'd go back to the point that it's not hugely new news.
And I think investors have kind of priced in the prospect of nothing much happening, at least until we have the French presidential election in April 2027. Okay, so it's something to watch. But we don't think that it's going to have much of a change in the short term.
Well, it's all short term, but we don't think it's going to have much of a market impact. No. And I think what I've said to clients this week is that we need to just be mindful of any kind of speculation that may build about President Macron changing his mind and considering an early presidential election.
I don't think he'll do that. But if that was to happen, then I think it becomes a broader, bigger issue for European markets and certainly, obviously, for France and the euro from an FX perspective. Okay, brilliant.
Well, Derek, that's all the questions I have for this week. Is there anything else that you want to talk about? No, I think we've covered everything.
We're running through, okay. Yeah, yeah, pretty much. Like, we've got an eye on the UK, you know, I just still have concerns there in terms of the fiscal risks where, you know, if you look at inflation expectations or inflation swap rates or break-evens, it's clear when you look at, say, the US versus the UK or that for the UK, the rise in gilt yields is much more fiscal-related than it is inflation-related.
And I think, as I've mentioned on this call as well before, you know, we're seeing the strongest negative correlation between long-term gilt yields and the pound as they're the strongest negative correlations when you compare it to the other major economies. So, you know, those fiscal risks are real and that's a danger. And I think definitely from an FX perspective, it's a reason to be certainly cautious on the prospects of the pound advancing on a trend line basis over the next 12 months.
I think there's definitely episodes in there where we're going to get a selling relation to fiscal risk.