US Dollar: Fragile strength hinges on Fed – Commerzbank

Commerzbank’s Thu Lan Nguyen notes EUR/USD has dropped to its lowest level since mid-2025 as Dollar strength is driven by rising US rate expectations and a higher probability of an October Fed hike than an ECB move.

Fed scenarios drive Dollar outlook

"The Fed raises rates and signals its willingness to tighten further. In this case, the Dollar is likely to hold on to its gains."

"The Fed raises rates but tempers expectations of further near-term hikes. In this scenario, the Dollar would likely weaken moderately, as the additional rate increases currently priced in by the market would become less certain."

"The Fed leaves rates unchanged but signals that the next move is likely to come in December. In this case, the Dollar’s reaction will depend on whether the market merely postpones its rate expectations, in which case the Dollar would probably come under only temporary pressure, or whether it reassesses the Fed’s reaction function and revises its entire expected rate path lower, in which case the Dollar is likely to face more substantial downward pressure."

"Against this backdrop, I would still regard the current Dollar strength as rather fragile, not least because it already appears overstretched even relative to developments in the Euro Area-US interest rate differential."

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