FX talking: Don’t call it a Dollar comeback

ING Global Economics Team ING Economic and Financial Analysis

ING now leans towards a September Fed hike, boosting the dollar in the near term, but our broader bearish dollar view is delayed rather than derailed.

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It remains a very close call, but the ING house view now favours a Fed rate hike later this month. Bearish flattening of the US yield curve is typically positive for the dollar, especially against the low yielders. We now see EUR/USD ending this year at around 1.16 from 1.18 previously. Yet this is not 2022 and the Fed is not about to embark on a significant tightening cycle. Our forecast dollar decline is delayed not cancelled.

We now push that cyclical dollar drop back to next spring, when US inflation should have dropped close to 2% and markets should be swinging back towards a normalisation story of the policy rate returning to 3.25%. It is not our baseline call, but that dollar drop could come earlier were uncertainty to emerge around US mid-term results in November or if Washington lost control of the bond market.

Another wild card is USD/JPY. A lot of yen-positive news is priced in, including a faster Bank of Japan tightening cycle and perhaps some major portfolio adjustments amongst local fund managers. Unless we are underestimating a major US-Japan policy accord, USD/JPY looks more likely to trade a 155-160 range than immediately drop under 150.

Elsewhere in G10, relative value trades will continue to be popular. The scope for even higher rates in Australia and Norway should keep the Aussie dollar and krone supported, while a higher interest rate environment should keep the Swiss franc on the back foot.

Within EM, high yielders should remain favoured given what should continue to be a low volatility world. The Turkish lira will remain popular, but the Brazilian real will be watched closely ahead of October elections. We still like the Hungarian forint, with budget plans in October shining a light on euro aspirations. And in Asia, the North-South divide continues.

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ING Global Economics Team

ING Economic and Financial Analysis

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