Fed rate hike bets support the US dollar, but how much further can it run?
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.
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.
How firms align with this view
Aligned with the desk view
Contrary positioning
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.
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.
Risks to this view
The primary risk to the dollar's outlook lies in an unexpected bearish shift in long-term Treasury yields, coupled with escalation in geopolitical risks that could diminish its safe-haven status. Any adverse developments in the upcoming Trump-Xi summit or Middle Eastern tensions might also shift sentiment away from the dollar.
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 expects "the front-end repricing to keep the USD supported into October", although it is already “wary of chasing it”.
And that distinction matters. The firm argues that dollar shorts had already built up steadily beforehand, meaning some of the latest strength may reflect short-covering rather than a fresh wave of bullish positioning. That leaves the underlying rates story doing most of the heavy lifting I would say.
More hawkish Fed expectations and higher front-end US yields continue to favour the dollar. And that is a view also shared by Credit Agricole in their latest dollar outlook. The firm argues that the dollar has started to “close the gap” with its relative rate and yield advantage, while still trading at a “huge discount” to those fundamentals.
From that perspective, the more bullish dollar argument is still fairly straightforward. That being US rates remain relatively attractive and the currency may not yet fully reflect that advantage. The only question is how much upside potential is left.
ANZ sees the long end of the Treasury curve as more of a constraint. The firm notes that: "Heavier issuance alongside rising US interest costs is increasingly USD-negative rather than supportive." They still see mild upside risks for the dollar in the week ahead but warns that DXY gains may be capped closer to 101. Meanwhile, Credit Agricole flags geopolitical risks as the wildcard.
The Trump-Xi summit and Middle East developments could influence the dollar’s safe-haven appeal, particularly if either trade or geopolitical tensions escalate again. In putting all of that together, the signal I would gather is that the fundamental support for the dollar is still there. However, the easy part of the move higher may already have come and gone.
This article was written by Justin Low at investinglive.com.
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