OCBC’s Sim Moh Siong and Christopher Wong highlight that a more hawkish Federal Reserve and flatter US yield curve have replaced high Oil prices as the main support for the Dollar. Their new forecast sees EUR/USD at 1.11 and USD/JPY at 163 by year-end, with DXY projected to gain 2–3% and low-yielders like the Swiss Franc and Japanese Yen under pressure.

Fed signals underpin stronger Dollar

"The USD strengthened despite weaker terms of trade from lower oil. A more hawkish Fed and flatter yield curve have replaced high oil prices as the main support for the USD."

"Two messages stand out from the hawkish Fed signals. First, it has reassured markets on policy independence, triggering an unwind of debasement trades through lower gold and crypto, a flatter curve and a stronger USD. Second, with the Fed back in focus, the USD is realigning with rate differentials after the earlier dislocation during the energy shock."

"New USD forecast: EUR/USD at 1.11 (previous: 1.18) and USD/JPY at 163 (previous: 155) by year-end. Hawkish Fed signals lift USD, shifts our view to modest strength from rangebound. DXY breakout targets 2 to 3 percent upside; 5 percent move requires oil surge or US overheating scenario."

"A firmer USD alongside widening rate differentials tends to weigh most on low-yielders such as CHF and JPY. Procyclical carry can still perform, but trade resilience will depend on selecting appropriate funding currencies."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)