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Hawkish fed rhetoric, elevated yields mean dollar index may be headed for 108, say analysts 

The U.S. dollar index expanded its gains to hit 107.2 on Wednesday, reaching its highest point since November.  

This upward trend is in line with rising U.S. Treasury yields and is driven by the persistent hawkish comments made by officials from Federal Reserve (Fed) — the U.S. central bank. These comments continue to reinforce the expectation that interest rates will remain elevated in the near future — a policy stance that is now widely referred to as “higher for longer”. 

As highlighted by Markets.com Chief Market Analyst Neil Wilson in an overview on Wednesday, a range of Fed officials have issued comments in recent days. 

Loretta Mester of the Cleveland Fed went for higher

 

“I suspect we may well need to raise the fed funds rate once more this year and then hold it there for some time as we accumulate more information on economic developments and assess the effects of the tightening in financial conditions that has already occurred”.

 

Fed vice chair Michael Barr stressed longer: 

 

“The most important question at this point is not whether an additional rate increase is needed this year or not, but rather how long we will need to hold rates at a sufficiently restrictive level to achieve our goals”.

 

Fed governor Michelle Bowman couldn’t decide and pushed for both higher and longer: 

 

“Inflation continues to be too high, and I expect it will likely be appropriate for the (Fed) to raise rates further and hold them at a restrictive level for some time”.

 

U.S. economic indicators have consistently indicated the resilience of the country’s economy. The JOLTS report revealed a higher-than-expected number of job openings last month, while the ISM Manufacturing PMI for September indicated the smallest contraction in factory activity in nearly a year. 

Investors are eagerly awaiting the upcoming payrolls report and will be closely monitoring further remarks from Federal Reserve officials in the days ahead. 

The dollar has strengthened against all major currencies, with the most notable appreciation observed against the Australian dollar (AUD/USD) following the Reserve Bank of Australia's decision to keep interest rates unchanged on Tuesday. The greenback has also gained ground against the Japanese yen (USD/JPY), the British pound (GBP/USD), and the euro (EUR/USD) in recent days, although some of those gains briefly scaled back on Wednesday.  

 

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Dollar forecasts: DXY may be headed for 108, say analysts 

On Wednesday, ING’s Global Head of Markets Chris Turner wrote the dollar index could be headed for the 108 mark in his dollar forecast, as there is “little reason” to sell the greenback at present, according to the economist: 

 

“Today we will again hear from Fed hawk Michelle Bowman who earlier this week was calling for multiple further hikes. Today also sees the September ADP jobs report (a somewhat discredited release) and ISM Services data.

There seems little reason to sell the dollar at present – perhaps only a shock drop in ISM services could weigh on the dollar today.

106.70 is now support for DXY and the direction of travel remains towards 108.”

 

Scotiabank Chief Currency Strategist Shaun Osborne’s USD forecast, issued on October 3 and cited by the FXStreet Insights Team, was similar to the view expressed by ING’s Turner: 

 

"The broader USD trend higher is elevated and looks overextended but evolving market sentiment and positioning suggest the USD rise could well extend further.

Technical signals suggest the rise may slow – at least – in the short run. The intraday chart shows the DXY reversing from the top of the bull channel that has guided the index higher since July. Losses may not extend much more than 0.4-0.5% while elevated US yields are driving sentiment, however.”

 

On October 2, analysts at Societe Generale wrote that the U.S. dollar index could return to 108 provided it broke past the 106.80 level: 

 

“A return above 106.80 potentially sets up the DXY for a return towards 108 and the highs of late November last year.

Underwhelming US ISM and NFP data, and/or FX intervention by the BoJ (selling USD) would thwart the upward trend.

Dollar dips look set to continue to attract buying interest as investors respond to the bear steepening of the 2s/10s Treasury curve. The spread moved through -50 bps in September. The March low of around -40 bps is key resistance.” .

 

Economists at Charles Schwab said the dollar index was unlikely to continue on its upward trajectory, unless the Fed shifted its hawkish stance and signaled the end of its tightening cycle: 
 
 

“The dollar's strength is likely to continue until there are signs that the Federal Reserve is poised to shift from its tight monetary policy stance to easing. 

We do not expect the U.S. dollar to go back to last year's peak. However, it is likely to remain in an uptrend until the underlying fundamental factors propelling it higher change.”

 

In their latest FX Snapshot on October 3, analysts at Citibank Hong Kong were bearish in their dollar forecast, saying the current levels of the U.S. dollar index were a “likely overshoot”, given the Fed’s likely upcoming slowdown in 2024: 

 

"Relative data momentum and surprises continue to move sharply in favour of the USD, as have relative rates momentum. A US soft landing is more likely to look like US exceptionalism, rather than global goldilocks. This is because it’s set against a global backdrop where China is still weak and EZ soft data continues to underperform. But for now, the repricing towards a US softer landing to drive a tactically higher DXY though much of this may already be well discounted into the higher US rates and the currency and should cap further gains in DXY. The current level of DXY is therefore a likely overshoot.”  

 

Citi’s 3-month USD forecast was bearish placing the DXY index at a potential average of 104.17. The 6-to-12-month forecast was slightly bullish, suggesting that the DXY could rise to 104.48, according to the bank.   
  
The bank's long-term projection for DXY was bearish, projecting the pair to recover and trade at a potential average of 93.48. 

At the time of writing, DXY was trading around the 106.65 mark, down 0.37% on the day after hitting the 107.2 mark in early trading.  
 
Dollar dynamics were mixed in other pairs, as EUR/USD was trading at $1.0529 (up 0.6%), USD/JPY fell by 0.1% and traded below the crucial 150 mark at 148.8, while the pound to dollar rate (GBP/USD) rose by 0.8% to trade at $1.2175.  

When considering foreign currency (forex) for trading and price predictions, remember that trading CFDs involves a significant degree of risk and could result in capital loss. Past performance is not indicative of any future results. This information is provided for informative purposes only and should not be construed to be investment advice. 

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