US Dollar: Modestly stronger into year-end – OCBC

OCBC strategists Sim Moh Siong and Christopher Wong highlight that the US Dollar (USD) stayed resilient despite improved risk appetite, supported by hawkish Federal Reserve (Fed) commentary that limited the drop in US front-end yields. They remain comfortable with a modestly stronger USD outlook through year-end, citing ongoing Fed tightening risks and continued challenges for European currencies, even as equities rally on tech strength and easing geopolitical concerns.

Fed hawkishness underpins resilient Dollar

"The USD traded mixed rather than weaker despite fading safe-haven demand. Risk sentiment improved on the back of a tech-led rally, optimism around US-China talks, and lower oil prices as hopes for US-Iran diplomacy and improving traffic through the Strait of Hormuz eased supply concerns."

"Falling energy prices helped reduce near-term inflation worries and pushed global yields lower overnight. However, while European yields declined across the curve, hawkish Fedspeak limited the drop in frontend US yields and provided support for the USD."

"Chicago Fed President Goolsbee argued that persistent supply shocks can no longer be simply looked through, while St. Louis Fed President Musalem suggested further policy tightening may still be necessary. Attention now turns to New York Fed President Williams. As a key voice among Fed doves, his comments will be closely watched, particularly after he joined last week's rate hike decision."

"We remain comfortable with a modestly stronger USD outlook through year-end given ongoing hawkish Fed risks. However, a more meaningful USD rally would likely require clearer evidence of demand-driven inflation rather than inflation stemming primarily from supply-side pressures."

"Our constructive USD view also reflects continued challenges for the euro. European currencies remain weighed down by fiscal concerns, particularly in France, elevated energy costs, and limited exposure to AI-driven investment. At the same time, the CNY continues its gradual appreciation against the USD, while prospects for the JPY could improve if Japan's policy backdrop becomes more supportive."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)