US Dollar: Hawkish Fed supports Dollar near term – OCBC

OCBC strategist Christopher Wong notes that the Fed’s 25bp hike and higher dots have extended the US Dollar (USD) rebound, with the US Dollar Index (DXY) around 100.3. Wong stresses that substantial Fed tightening is already priced, so softer US data could reopen USD downside.

Dollar rebound but data risk looms

"USD extended its rebound after the Fed raised rates 25bp and delivered a sizeable upward shift in the dots. DXY initially traded around 100 following the decision but pushed towards 100.3 during Warsh’s press conference as front-end UST yields moved higher."

"Warsh kept the focus firmly on inflation, saying recent data had shown little improvement in underlying trends. He also noted that the economy had strengthened and the labour market was around full employment while characterising the rate increase as “removing a dose of accommodation”."

"The USD move was notable given that substantial tightening was already priced going into the meeting, although the relatively modest repricing in UST yields suggests the Fed did not materially exceed market expectations further out. With the Fed validating a hawkish policy path and front-end yields elevated, the USD may retain moderate support in the near term. But with substantial tightening expectations already embedded in the curve, attention should increasingly shift back to the data."

"Any moderation in activity, labour-market conditions or inflation could prompt some unwinding of rate expectations and reopen downside in the USD."

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