US Dollar: Rally faces monetary-policy limits – DBS

DBS Group Research economist Philip Wee says the Dollar’s three-week rally is losing monetary-policy support as senior Federal Reserve officials push back against expectations for another rate hike at the October 28 FOMC meeting. He argues that the source of rising long-dated Treasury yields is becoming increasingly important for the USD, as higher term premia linked to debt supply, fiscal sustainability and market credibility may offer less support than Fed-driven tightening. The November 3 US midterm elections add another potential constraint to the Dollar outlook.

Fed hesitation challenges USD momentum

"The USD’s three-week rally is running out of monetary-policy fuel. Senior Fed officials have pushed back against expectations for a back-to-back hike at the October 28 FOMC meeting. After softer US PCE inflation and nonfarm payrolls data, another concern is emerging."

"Attention could therefore rotate back towards the more uncomfortable reason long-dated Treasury yields are approaching pre-Global Financial Crisis highs. This distinction matters for the USD."

"Higher yields driven by Fed tightening can support the USD. Higher term premia driven by concerns over debt supply, fiscal sustainability, and Treasury-market credibility need not."

"The November 3 US midterm elections add another constraint. President Donald Trump and his administration face voter backlash over rising living costs. Tariffs and the Iran conflict have driven up grocery and fuel prices, while households are also confronting higher mortgage and other borrowing rates amid weak real wage growth."

"If Republicans lose control of the House, markets could also reassess the US exceptionalism narrative that supported the USD after its post-Liberation Day sell-off."

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