Can the US Dollar extend its Fed-driven rally?

The US Dollar (USD) has pushed higher, with the Dollar Index (DXY) climbing back above 100.00 in the wake of the Federal Reserve's hawkish policy update under new Chair Kevin Warsh. Markets have raced to price in rate hikes, 2-year Treasury yields have jumped to a 15-month high, and the Greenback has gained against every G10 currency. The near-term support looks clear: the real debate is over how much further the rally can run.

Deutsche Bank: September hike odds surge from 36% to 80%

Deutsche Bank ties the US Dollar move directly to Warsh's hawkish debut and a more aggressive dot plot. The repricing drove 2-year Treasury yields to a 15-month high of 4.19% (their largest one-day jump in more than a year) and lifted the Dollar against every G10 currency, while Gold and Bitcoin slipped.

That shifting Fed rhetoric led to a dramatic fed funds repricing, with chances of a September hike rising from 36% to 80% by yesterday's close and 38bps of hikes being priced in by year-end.

ING: Gains can hold, but the rally looks close to its ceiling

ING points out that markets now price around 44bp of tightening by the second quarter of next year, broadly matching the modest adjustment most Fed members signaled in the dot plot. 

With DXY testing the top of its 12-month range near 100.50-100.60 and no clear catalyst for a major upside breakout (particularly with energy prices easing after the US-Iran deal), ING keeps the US Dollar capped.

The US Dollar is holding gains, but probably does not need to rally too much more.

MUFG: A potential bullish breakout, against a weaker-Dollar forecast

MUFG notes the US Dollar Index is back above 100.00 and closing in on its year-to-date high of 100.64, with markets now pricing multiple hikes and bringing the first move forward to September or October. Even so, MUFG still expects no hike this year and warns that the hawkish shift poses upside risks to its forecast for a weaker Dollar next year.

The Fed's hawkish policy update is threatening to trigger a bullish breakout for the US dollar more than offsetting the dampening impact from the US-Iran deal announcement over the weekend.

Where the three banks agree – and where they split

The common thread is clear: the Fed's hawkish turn under Kevin Warsh has lifted US rates and handed the Dollar fresh near-term support, with DXY back at the top of its recent range.

The disagreement is about staying power: Deutsche Bank documents how fast the market has repriced, ING argues most of that adjustment is now in the price and sees little fuel for a breakout, and MUFG flags a possible bullish break while holding to its longer-term call for a softer Dollar. 

The net message: all three lean constructive on the Dollar through the summer, but ING and MUFG both caution that the rally may owe more to repositioning than to the start of a sustained uptrend.

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