Fed rate hike bets support the US dollar, but how much further can it run?
At a Glance
The dollar is gaining traction as expectations around rate hikes bolster its appeal, bolstered by short-covering dynamics according to analysis from both ANZ and Credit Agricole. Per the full note , ANZ highlights that while a supportive shift in the rates backdrop is evident, caution in accumulating long dollar positions is warranted due to prior short positioning. As both firms recognize the improving rate advantage for the dollar, the main question remains how much further it can climb in the near term amidst potential constraints from long-term Treasury yields.
Key Takeaways
- 01The dollar's recent gains are propelled by short-covering and improving rate expectations.
- 02ANZ cautions against aggressive long positions due to previously established dollar shorts.
- 03Credit Agricole emphasizes that the dollar remains undervalued relative to its rate advantage.
- 04Potential upside for the dollar may be limited by long-end Treasury yield pressures.
Full Analysis
What the desk is arguing
The desk argues that the dollar's strengthening is primarily driven by changing rate expectations as articulated by both ANZ and Credit Agricole. Per the full note , the increased hawkish sentiment from the Fed and rising front-end U.S. yields act as critical pillars for this dollar support.
Supporting this view, ANZ notes that prior builds in dollar shorts mean the recent strength could be more reflective of short-covering rather than renewed bullish sentiment. Consequently, the effective support from rising yields may be the primary driving force keeping the dollar buoyant.
Where it sits in our coverage
Our current consensus target for the dollar is 1.075, with a range between 1.04 and 1.12. Specific firms share the following targets: - jpmorgan - 1.10 (Mar26) - bofa - 1.04 (Mar26)
The desk's call aligns closely with jpmorgan's target, suggesting a relatively optimistic outlook on the dollar's strength compared to bofa, which holds a more restrained view. Given the positioning dynamics highlighted, the potential for the dollar reaching 101 on the DXY appears plausible but cautious.
How other firms see it
Both anz and creditagricole share a favorable view on the dollar's near-term strength, driven by the supportive rate framework. However, there are contrasting views, mainly from bofa, which suggests limited upside amidst concerns about long-end yields.
Watch the USD/JPY movement to gauge spillover effects related to rising yields and broader geopolitical tensions, particularly as stability in U.S. rates may be pivotal to maintaining dollar strength.
Market Implications
Traders should monitor the DXY approaching levels near 101, as this could mark a viable resistance point given the cautious outlook on dollar positioning. Rate developments in the U.S. and ongoing geopolitical matters will also be critical indicators for dollar strength in the near term.
From the original
The dollar is finally starting to respond more convincingly to the shift in the rates backdrop, and both ANZ and Credit Agricole see reasons for that support to extend in the near-term. However, there is a subtle difference in the way that they are framing the move. ANZ says it e
Related speeches
4 itemsFX Daily: Dollar finally catching up with its drivers
The desk highlights a noticeable uptick in the dollar's performance as it aligns with several positive short-term drivers, including robust front-end rates, escalating energy prices, and diminished risk appetite. Per the full note [source], the DXY index experienced its strongest session since the Jackson Hole speech, a testament to these supportive macroeconomic indicators. Currently, the market's attention is likely focused on the Fed's impending FOMC announcement, which may heighten volatility for the dollar in the short term, particularly if any signs of rate hikes are reinforced. Our current assessment of the USD position is also informed by the latest trend in Treasury yields, which pushed the 10-year rate to 5.0%, maintaining a tolerable premium over the estimates for neutral rates.
FX Daily: More bond fuel for the dollar rally
The desk hinges its outlook on the burgeoning momentum for the dollar, propelled by fresh signs of bond market strength. Per the full note from ING Economics, the recent uptick in U.S. Treasury yields acts as an undercurrent driving investors towards the dollar. This sentiment correlates with broader market trends indicating that higher yields typically support dollar demand. As we venture forward, the lack of high-impact events on the calendar signifies that any movement in the dollar will likely stem from ongoing bond market trends and not immediate data catalysts.
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