FX Daily: Dollar price action quite poor
The desk highlights a period of notable weakness in the US dollar despite supportive fundamentals such as elevated energy prices and firm short-dated US interest rates. Per the full note from ING, the subpar performance of the dollar is attributed to a combination of low-volatility investment flows away from the dollar and high volatility in USD/JPY as macro hedge funds position for a potential move below 150. With a Friday US CPI release expected to frame the Fed's next steps, the current softness in the dollar raises questions about market positioning amidst stable global equity indexes and expectations for a forthcoming 25bp rate hike from the Fed. This ongoing situation is in contrast to the increasingly bullish sentiment displayed towards both the euro and the pound, as indicated by recent consensus forecasts.
What the desk is arguing
The desk frames this as a puzzling moment for the dollar, with several supportive factors seemingly having little effect on its strength. The observation from ING indicates that heightened energy prices should favor the dollar's position by driving trade flows, yet it remains under pressure from persistent low volatility in investments.
Supporting this view, short-dated US interest rates have held steady as the market anticipates Friday's CPI report, which may solidify expectations for an imminent Fed rate hike. Despite these positive signs, the recent negative correlation between equities and dollar strength suggests capital may be flowing elsewhere, particularly into global equities amidst a resilient growth narrative fueled by AI.
Where it sits in our coverage
Currently, our consensus for EUR/USD is at 1.1700, with a range between 1.1200 and 1.2000. Notably, ing projects the pair to reach 1.1700 by March 2026, while morganstanley and rbc anticipate slightly stronger outcomes of 1.2000 and 1.1700 respectively, illustrating a broadly bullish outlook on the euro against the dollar.
How other firms see it
Firms such as morganstanley and rbc are aligned with a bullish sentiment towards the euro and pound, projecting upward movement against the dollar, contrasting with nomura, which anticipates a weaker euro by the end of March 2026 with a target of 1.3200. The ongoing dollar dynamics suggest that traders should keep a close eye on USD/JPY movements, especially in light of potential policy shifts from the BoJ that could exacerbate the dollar's vulnerabilities.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01The US dollar's recent performance is disappointing despite supportive factors.
- 02Elevated energy prices and high US short-term interest rates are not translating into dollar strength.
- 03Low volatility in financial markets is promoting a shift away from the dollar.
- 04USD/JPY remains in focus as volatility increases amidst macro positioning.
Market implications
Traders should watch the USD/JPY pair closely, especially for signs of a breakdown below the 150 level, which could trigger further dollar weakness. Additionally, the upcoming US CPI report on Friday will be crucial in shaping expectations around the Fed's next policy moves, particularly in the context of the anticipated rate hike.
Risks to this view
A significant reversal in the dollar's current trajectory could be prompted by stronger-than-expected US CPI results or a divergence from projected Fed rate hikes, which might bolster dollar demand. On the flip side, increased geopolitical tensions or a severe economic downturn could further undermine confidence in dollar assets.
EUR/USD — All Desk Targets
| Firm | Stance | YE 2026 |
|---|---|---|
BNP Paribas | Bearish | 1.1500 |
UBS | Bullish | 1.1800 |
UOB | Bullish | 1.1800 |
Articles FX Daily: Dollar price action quite poor Published 07:45 FX Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Despite higher energy prices and firm short-dated US interest rates, the dollar remains soft. Wild swings in USD/JPY remain the main event, but the benign, low-volatility investment environment is another key factor encouraging flows out of the dollar. The calendar is quiet today and the focus will probably return to US Treasuries ahead of auctions Chris Turner , Frantisek Taborsky and Francesco Pesole USD: Dollar should be doing better Dollar price action this week has been a little disappointing/confusing.
Higher energy prices due to an escalation in the Gulf will direct more trade flows towards the US at the expense of Europe and Asia. At the same time, US short-dated rates remain relatively elevated as they await Friday's US August CPI release – what should be the final piece of the puzzle for the Fed's policy decision next week. We are expecting a 25bp Fed rate hike.
The fact that the dollar is not stronger may be attributable to both the investment environment and to developments in USD/JPY. On the former, global equity markets remain near their peaks as the AI investment boom keeps global growth relatively resilient. As mentioned earlier this week, one of the tightest FX correlations out there is the negative one between equities and the dollar.
A very fragile USD/JPY is probably also contributing to the dollar malaise, as global macro hedge funds position for a downside break of 150 over the coming months on expectations that Japanese policymakers will deliver on their side of some grand bargain with Washington. There is also the question of whether buy-side investors are quietly raising their dollar hedge ratios. Certainly, the most recent data we have seen this summer suggest the European buy-side has been running relatively low FX hedge ratios on US assets – a position which could be challenged in investment committee meetings as they consider more activist US Treasury policy.
On that front, the bond market will be in focus today as the US Treasury starts its buy-back operation of longer-dated Treasuries, plus auctions $39bn and $22bn of 10 and 30-year bonds today and tomorrow, respectively. We don't fully understand why the dollar is not reacting to higher energy prices and do not see a strong case for DXY to immediately break support at 98.55/65. If it were to break, we suspect USD/JPY would be the driver, and a quick drop in DXY to 98.00 could be seen.
Chris Turner EUR: Mid range Near 1.1600, EUR/USD is sitting approximately in the middle of its range seen since April. As above, we would have thought that the clear decline in the euro's terms of trade would be an important factor weighing on EUR/USD this week. The fact that it is holding up quite well probably raises more questions for the dollar.
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