US Dollar: Structurally stronger after Fed hike – ING

ING strategists Francesco Pesole and Frantisek Taborsky say the US Dollar (USD) now has a stronger floor after the Federal Reserve’s 25bp rate increase and hawkish guidance for another hike by year-end. They note US Dollar Index (DXY) has reached a two‑month high, with upside risks in the near term supported by higher Oil prices and disciplined Fed policy, although their baseline still sees Dollar stabilization and eventual softness into year‑end.

Fed hawkishness underpins near term strength

"Everything about yesterday’s FOMC meeting was hawkish. The widely expected 25bp hike was accompanied by a dot plot showing strong consensus for another hike this year. Out of 18, 12 members project one more increase and four project two more this year. Incidentally, growth and inflation projections were revised higher and unemployment lower. Chair Kevin Warsh didn’t give much away in the press conference, but reiterated a strong commitment to price stability and didn’t seem to indicate that policy is restrictive at current levels. In his own words, the Fed simply reduced a “dose of accommodation”."

"Despite hawkish pre-meeting bets, all of that still triggered a 10-12bp jump in the two-year USD swap rate. Market pricing for October is 13bp and for December 32bp."

"The dollar rallied across the board, with DXY up 0.6% and at a two-month high. We think risks are more balanced for USD now that the monetary policy boost has been absorbed, but they remain tilted to the upside in the near term. First, because such a hawkish message means – in our view – markets are given the freedom to fully price in October for the next move should data come in hot and/or oil prices rise further."

"Second, because the pledge of monetary discipline raises the bar for a return of the debasement trade. Third, because oil prices still make for a supportive external environment for the dollar."

"Our baseline call for the coming months remains one of stabilisation around current ranges first and a softer dollar then into year-end, but is heavily reliant on a de-escalation in the Gulf. As long as oil remains supported, it’s hard to argue against the bullish USD momentum."

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