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USD forecast

Dollar hovers at 10-month highs as yields spike on Fed’s higher-for-longer message 

 

The U.S. Dollar index (USDX) remained stable around the 106 mark on Tuesday, maintaining its highest levels in ten months as it followed the upward trend in U.S. Treasury yields as the Federal Reserve (Fed) offered a hawkish outlook on monetary policy due to persistently high inflation. 

Although the U.S. central bank decided to keep interest rates unchanged at its September policy meeting, it signaled an upcoming rate hike before the year's end and fewer expected rate cuts in the following year compared to previous projections.  

The federal funds rate currently stands in a range from 5.25 to 5.5%, with most policymakers projecting one more 25-basis-point rate increase before the end of the year.  

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USD news: Fed comments push up bond yields, DXY 

 

Chicago Fed President Austan Goolsbee suggested on Monday that the central bank might soon reach a point where it can maintain interest rates at a stable level — although a higher than the market is accustomed to. 

Interest rates will remain high “well into next year,” Goolsbee told CNBC in an interview. “That was a little longer than it seemed like markets had thought.”

"The risk of inflation staying higher than where we want it is the bigger risk. We have got to get inflation back down to target... We ought to have 100% commitment,” he added. 

Goolsbee said the Fed would need to "play by ear" whether any further rate increases are needed. 

He also said the debate over the current phase of Fed policy will “stop being how much more are they going to raise, and transform into well how long do we need to hold rates” at the peak level. The official’s message reiterated the stance adopted by major central banks around the world — borrowing costs will remain “higher for longer.” 

Minneapolis Fed President Neel Kashkari also reiterated the higher-for-longer message in a speech at the Wharton School of Business: 
 
"If the economy is fundamentally much stronger than we realized, on the margin, that would tell me rates probably have to go a little bit higher, and then be held higher for longer to cool things off.” 

His remarks contributed to a rise in the yield on the 10-year U.S. Treasury — the benchmark for borrowing costs worldwide. On Tuesday, the yield reached 4.566%. 

Kashkari mentioned that if inflation follows the expected cooling trend next year, the Fed will be required to lower interest rates to prevent policy from becoming overly restrictive. However, he also expressed his surprise at the resilience of consumer spending despite the previous rate hikes implemented by the Fed. 

"Everybody on the Federal Open Market Committee is committed" to bringing inflation back down to the Fed's 2% target, he said. Currently, inflation measured by the Fed's preferred indicator stands at 3.3% as of July. 

Investors are now focused on U.S. consumer confidence and home sales data expected on Tuesday to gain further insights into the economy. The dollar has reached multi-month highs against the euro (EUR/USD), pound sterling (GBP/USD), and yen (USD/JPY), and strengthened its position against the Australian (AUD/USD) and New Zealand dollars (NZD/USD). 

 

Dollar forecasts: Analysts see further short-term upside, look to slowdown in 2024 

 
As the dollar probed November 2022 highs after its tenth successive weekly gain, Kit Juckes, Chief Global FX strategist at Societe Generale, offered his take on the greenback’s performance and USD forecast: 

“Shutdown and downgrade concerns, month and quarter-end, talk of the US economy growing forever and forcing the Fed to do more and inflation worries have all been cited as reasons for the latest lurch higher in US yields, but I’ll go on favouring the need to offer higher yields to attract sufficient money to finance an endless stream of Treasury auctions.

The world must reallocate more of its capital to US bonds, and higher yields do the work, which then results in a stronger Dollar as more money either stays in the US or is attracted from abroad. This will provide the conditions for the US to slip into recession in 2024 and for the Dollar to weaken once the dust settles. In the meantime, the data are robust, and the Dollar is strong.”

Economists at Rabobank voiced similar concerns in their report, pointing towards the likelihood of a U.S. recession, saying that slowdown risks could “take the shine off” the dollar should the American economy decelerate. However, they added that the USD could find support on safe-haven demand triggered by weak global growth: 
 
 

“The US is still likely to experience technical recession early next year as monetary tightening increasingly takes effect. 

Understandably, many commentators are of the view that slowdown risks threaten to take the shine off the outlook for the USD. However, this assumes that investors see more opportunity elsewhere. It is our view that the Eurozone will suffer technical recession in H2 this year and that the region will only be able to muster very soft growth in 2024. China is also experiencing a slowdown in growth.

Even if the US economy is headed for a slowdown, the USD could find support on the back of haven demand given broad-based concerns over weak global growth.”


Analysts at German lender Commerzbank also indicated a potential upcoming dollar correction due to overly optimistic expectations for the U.S. economy: 
 
 

“Anyone betting on continued Dollar strength or even appreciation should realise that this is a bet on the performance of the US economy, which results in increased susceptibility of the Dollar against weaker economic data.

Against this background, we continue to see the likelihood of a correction of the current Dollar strength, simply because a lot of US optimism seems to be priced into the USD. However, the likelihood of this happening falls with increasing signs that the economic differential between the US and the Eurozone is increasing.”

 

ING’S Global Head of Markets Chris Turner wrote the steepening of the U.S. Treasury curve was likely driven by two factors: 

“The first is the ongoing upward revision to where the Fed Funds rate settles after the next Fed easing cycle. Looking at the forward curve for one-month USD OIS rates, investors now see the low point in any future Fed easing cycle at around 4.00% in three years' time. Rather incredibly, at the start of this year, the market had seen the low point for Fed Funds in three years' time down at 2.70%.

The second factor weighing on Treasuries is this week's $134bn auction of two, five and seven-year notes – which takes place over the next three days. This comes ahead of a potential US government shutdown this Saturday, where hard-right Republicans in the House seem to be holding out against a stop-gap spending bill. In the background remains a threat of another downgrade of US sovereign rates on the back of an 'erosion of governance'.

In general, however, the continued rise in US yields is making for a less benign environment and favours risk reduction. […] We would say commodity currencies remain vulnerable, especially those like the South African rand and Latam currencies – this latter group were hit hard during the early August sell-off in Treasuries.

DXY can probably stay bid through this if activity currencies come under pressure and technical analysts will be dusting off calls for a move to the 107.20 area.”

 

Economic data aggregator TradingEconomics was bullish on the dollar in its most recent USD forecast, projecting the DXY index to possibly trade at 106.97 by the end of this quarter.  
 
The platform’s 12-month dollar forecast estimated the index to trade at a potential 111.20 by late September 2024.  

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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