The US Dollar (USD) has declined since Monday, in line with our call. While there are some signs that Ukraine peace deal optimism is supporting European currencies, short-term misvaluation justifies a dollar correction. Despite that, the dollar remains expensive relative to short-term market drivers and with markets reinforcing bets on a December Fed cut, risks remain on the downside for USD into Thanksgiving, ING's FX analyst Francesco Pesole notes.

USD correction supported by short-term misvaluation

"Some headlines that Ukraine had accepted the terms of the peace deal proved misleading yesterday. The tone is generally constructive, but there are sticky points that both Ukraine and Russia are still negotiating with the US. What is clear is that the US is making its strongest attempt to date to broker a truce, and that Ukraine has opened up to some degree of compromise. The US is sending its peace envoy, Steve Witkoff, to speak with President Putin today. Any signs of a breakthrough should weigh on energy prices and the dollar, while favouring high-beta European currencies."

"Domestically, one interesting development at the Fed: Kevin Hassett is reportedly the frontrunner to replace Powell as Chair, and the announcement may come before Christmas. Hassett is one of the most dovish candidates, and his nomination could prompt markets to revise the terminal rate lower (now just below 3.0%) and weigh on the dollar."

"Finally, we have published our preview of the Treasury’s FX Report, which is due in the coming weeks after a shutdown delay. Based on our estimates, no country met the three criteria, and no FX manipulator tags should be announced in this report. However, Thailand should join the Monitoring List."