US Dollar: Modest upside scope as risks recalibrate – OCBC

OCBC’s Sim Moh Siong notes that the US Dollar (USD) softened slightly as global risk appetite improved on easing geopolitical tensions and a tech rebound. However, resilient US data, hawkish Federal Reserve (Fed) signals and sustained AI (Artificial intelligence) capex, contrasted with weaker Europe and China and a behind-the-curve Bank of Japan (BoJ), support scope for modest USD upside. Near-term USD direction now hinges on European Central Bank (ECB) Sintra signals and US payrolls.

Risk backdrop supports mild Dollar strength

"The USD softened slightly in the more constructive risk backdrop. Near-term direction now hinges on stronger catalysts, notably central bank signals from the ECB Sintra forum and Thursday’s US payrolls report."

"In a narrow 5-4 ruling, the Supreme Court allowed Governor Cook to remain on the Fed Board while her case proceeds. By limiting removal risk, the decision reinforces Fed independence versus other agencies. Markets took it in stride, suggesting expectations were aligned."

"Still, it helps ease concerns about Fed independence and “debasement” risk. Debasement trades have already started to unwind, reflected in a flatter US yield curve and softer gold and crypto."

"Resilient US data, hawkish Fed signals and sustained AI capex contrast with weaker momentum in Europe and China, and a behind-the-curve BoJ. This backdrop supports scope for modest USD upside."

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