US Dollar: Hawkish Fed outlook lifts DXY towards 102.85 - ING

ING’s Chris Turner notes the Dollar remains supported after September FOMC minutes showed a Federal Reserve still expecting another rate hike this year. Money markets already price a 25bp move in December and further tightening in 2027, which ING sees as too aggressive but unlikely to be challenged. Elevated Treasury yields, rising volatility and strong demand at the latest US 10-year auction underpin Dollar strength, with US Dollar Index (DXY) seen grinding towards 102.85.

Fed pricing keeps Dollar supported

"September FOMC minutes published last night reflect a hawkish Fed. One sentence which caught our eye was: "Most participants assessed that another increase in the target range for the federal funds rate would likely be appropriate by year-end." This followed a discussion of frustratingly high inflation and the Fed being surprised about the pace and magnitude of the AI build-out."

"But a hawkish Fed is firmly priced by money markets at this stage. After an expected 25bp hike to 4.25% in December, the market still looks for another 50bp of tightening next year. We think that is too aggressive, but doubt the market will want to fight against that hawkish pricing this year."

"Additionally, the US 10-year Treasury auction went very well last night, with a strong bid-to-cover ratio and a strong indirect bid, serving as a reminder that demand for Treasuries does exist if yields are high enough."

"This leaves the dollar well-supported and winning more friends in a slightly more difficult investment environment. Here, elevated Treasury yields and rising volatility have sucked money out of the carry trade, where most Latam currencies have been hit quite hard. Given events in Europe, we're looking for the dollar to hold onto gains over the coming months."

"DXY can grind up towards a target at 102.85."

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