US Dollar: Could easing rates trigger a correction? – ING

The Dollar gained as AI-led equity selling spread to defensive stocks, ahead of the strong US jobs data, according to ING strategists Francesco Pesole, Frantisek Taborsky and Chris Turner. In their assessment, the rally appears overstretched, with lower short-dated US rates and the forthcoming US CPI release likely to cap further gains.

Has the Dollar rally become overstretched?

"We think the dollar rally requires the risk-off mood to persist this week. Otherwise, there is some moderate correction risk, as Friday’s move looked a bit too stretched relative to short-term market drivers. Still, in our view, the macro story should prevent DXY from returning to last week’s lows of 101.1."

"We expect tomorrow’s October US CPI to come in at 0.3% month-on-month for both headline (consensus 0.3%) and core (0.3%). That should help cement expectations for a December Fed hike (19bp priced in), making the swap curve more protected from other equity market shocks."

"Contagion from AI to defensive stocks in the US and worldwide allowed the dollar to rally even before the strong US jobs market report. But unless risk sentiment remains poor this week, lower front-end US rates should favour a weaker dollar, even if inflation tomorrow comes in slightly hotter than expected."

(An Artificial Intelligence tool helped produce this article, which was reviewed by an editor. Learn more.)