Yield curve dynamics drive the dollar
The dollar is underpinned by a flatter US yield curve, signaling a stronger outlook as Fed hawkishness persists, per the full note from ING. The projected trajectory shows a weaker yield curve translates to dollar-strength, with short-dated US yields poised over 4% possibly supporting this trend. The desk's consensus anticipates the dollar remaining robust into year-end, particularly as the EUR/USD pair is expected to be capped around 1.16 by a blend of Fed policy and evolving market dynamics.
What the desk is arguing
The desk argues that the dynamics of the US yield curve are increasingly important for dollar valuation. Per the full note from ING, a flatter curve is perceived as dollar-positive, especially under a backdrop of hawkish Fed signals.
With the recent rise in short-dated US yields surpassing 4%, the prospects for the dollar appear favorable as the market is conditioned for continued policy tightening. In light of these factors, ING has revised its EUR/USD forecast downward to 1.16 and updated its USD/JPY projections upward to 160.
The alternative read would be that if long-term Treasury yields were to surge above 5.50%, it could steepen the yield curve, resulting in a weaker dollar outlook, potentially disrupting carry trades across high-yield currencies.
Where it sits in our coverage
Our current consensus target for EUR/USD stands at 1.1700, with a range of 1.1200 to 1.2000 by Dec-26. Notably, firms such as ing and rbc have revised their forecasts to align with this tightening dollar outlook, with both expecting 1.1700 in the same time frame.
This view is mostly aligned with the consensus but leans towards the lower bound of the spread, as major estimates from firms like morganstanley project more optimistic targets of 1.2000 for the same period.
How other firms see it
Many firms, including hsbc and scotiabank, share a bullish outlook on the dollar, reflecting a consensus that aligns with the desk's view of dollar resilience amid tighter Fed policy. Conversely, firms like nomura have more conservative targets for both EUR/USD and USD/JPY, indicating a belief in potential downward pressure if yield curve conditions change.
Additionally, the EUR/USD trajectory is closely tied to the ECB's rate path and ongoing US monetary policy developments, making these pairs critical to watch as the global FX landscape evolves.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01A flatter US yield curve correlates with dollar strength, particularly with the Fed's hawkish stance.
- 02The dollar forecasts have been adjusted, lowering EUR/USD expectations while raising USD/JPY targets.
- 03Short-dated US yields above 4% are seen as a key supporting factor for the dollar.
- 04A shift towards higher long-end Treasury yields could invalidate current dollar strength forecasts.
Market implications
Traders should watch for EUR/USD to remain capped around 1.16 while monitoring short-dated yield movements in the US, which could provide further clarity on dollar strength. Any shifts in Treasury yields may also influence high-yield carry trades that are sensitive to volatility.
Risks to this view
The main risk factor that could derail this bullish dollar outlook includes any unexpected surge in 30-year Treasury yields beyond 5.50%, potentially steepening the yield curve and resulting in a weaker dollar scenario alongside increased market volatility.
EUR/USD — All Desk Targets
| Firm | Stance | YE 2026 |
|---|---|---|
Deutsche Bank | Neutral | 1.1668 |
BNP Paribas | Bearish | 1.1500 |
UBS | Bullish | 1.1800 |
Articles Yield curve dynamics drive the dollar Published 11:30 FX Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download It looks like the US yield curve is becoming increasingly important for dollar pricing. In simple terms, it seems a flatter curve is dollar-positive and a steeper curve is dollar-negative. In light of a more hawkish Fed outlook, we now expect the dollar to stay stronger for longer Chris Turner Fed hawkishness and a flatter yield curve should help the dollar Fed hawkishness versus the debasement trade EUR/USD continues to bounce around in a broad 1.13-1.18 range – largely determined by US policy settings.
In effect, the dollar has done a round trip on the hawkish-dovish-hawkish communication this summer by new Fed Chair Kevin Warsh. In light of ING’s house view switching to a rate hike in September, short-dated US yields well over 4.00% look like they can keep the dollar broadly supported into year-end. That is why we are dropping our year-end 2026 EUR/USD forecast to 1.16 from 1.18 and raising the USD/JPY profile to 160 from 158.
A Fed hike and presumably a hawkish Fed stance into year-end will go some way towards dissuading investors from the debasement trade, which since 2025 has favoured the likes of the Swiss franc, gold and bitcoin at the expense of the dollar. On the subject of the debasement trade, the recently announced US Treasury liquidity measures at the long end of the curve have unnerved investors and weighed on the dollar. Our forecasts of a stable/stronger dollar into year-end assume that the sell-off at the long end is relatively contained – tighter Fed policy should help.
If we’re wrong and 30-year Treasury yields surge through 5.50%, steepening the yield curve, then the dollar probably comes lower. Such a move would likely see a generalised rise in volatility and unnerve carry trade positions in high-yield FX. As to the timing of the next leg lower in the dollar?
On a cyclical view, we are now delaying our forecast dollar decline to the second quarter next year. That is when US inflation should have dropped back to 2% and Fed policy expectations can swing back from tightening to easing. EUR/USD versus the US 2-30 year Treasury curve Source: Refinitiv, ING "> Source: Refinitiv, ING Intervention just got more difficult Japanese authorities have little to show for the close to $100bn spent in USD/JPY selling intervention in late July/early August.
The success of intervention in 2024 was primarily a function of timing Fed policy settings superbly well ahead of a Fed easing cycle which started in September that year. Fast-forward to today and what should be imminent Fed tightening will work against recent FX intervention and place the burden squarely on the BoJ to surprise hawkishly. A 50bp hike in September seems unlikely, as do back-to-back hikes.
Sources & References
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