US Dollar: Downside risks build into FOMC – Scotiabank

Scotiabank strategists Shaun Osborne and Eric Theoret note the US Dollar (USD) is supported by sentiment even as rate differentials soften. They highlight a widening gap between US Dollar Index (DXY) and fair value, and argue that a neutral Federal Reserve (Fed) decision on Wednesday could leave USD risks skewed lower as disinflation trends are acknowledged.

Risk appetite weighs on Dollar outlook

"G10 currencies are mixed with a relative performance distribution that is suggestive of mild risk appetite in overall quiet trade."

"Rate expectations are muted, with 3bpts of tightening priced for tomorrow and 22bpts expected for December."

"We note the widening gap between the DXY (102.2 spot) and our FV estimate (100.5), reflecting recent sentiment-related support to the USD as interest rate differentials have softened and eroded its fundamental support."

"A neutral hold would leave risk for the USD tilted firmly to the downside, as policymakers could easily endorse the disinflationary trends previously highlighted among the narrower measures of inflation."

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