US Dollar Strengthens, OCBC Highlights Risk of Further Rises
The US dollar continues to receive strong support from high US government bond yields and the Federal Reserve's increasingly hawkish policy stance. Sim Moh Siong of OCBC believes the Fed's change in stance has led the market to reassess its expectations for a more aggressive interest rate path. This has kept the dollar strong, despite a brief weakening of oil prices and a slight easing of geopolitical risks.
According to OCBC, the rise in Treasury yields across all tenors indicates that the current dollar's strength is driven more by interest rate expectations, rather than solely by energy prices. This means the market sees the Fed still having reason to maintain a tight policy, especially as inflation has not yet fully returned to target. The Fed's hawkish stance has led investors to favor the dollar, as it offers attractive yields and safe-haven status.
OCBC also highlighted a shift in Fed Chairman Kevin Warsh's communication style, leading to a more concise approach. Shorter FOMC statements mean the market no longer receives as much direct guidance from the central bank, leading investors to increasingly focus on incoming economic data. This situation has the potential to increase volatility in the foreign exchange market, as any inflation, employment, and economic growth data can immediately change expectations regarding the direction of interest rates.
The next major focus will be the US core Personal Consumption Expenditures (PCE) inflation data for May. This data is the Fed's favorite inflation indicator and will be a key determinant of the dollar's direction. If the PCE shows that inflationary pressures remain strong, expectations of interest rate hikes could increase and support dollar strength. However, if the data begins to decline, the dollar's gains could be restrained, as the market may judge the Fed's hawkish stance to be excessive.
Although OCBC still sees the dollar moving within a limited range, the risk of further strengthening is increasing. A clear breakout of the dollar index (DXY) above its 14-month range could open the door to gains of around 2% to 3%. Even a larger rally above 5% remains a tail risk if oil prices rise back above US$100 per barrel or US economic growth, driven by the AI sector, overheats. In this scenario, inflation could rise again, unemployment would fall, and medium-term inflation expectations would also increase, potentially strengthening the dollar. (gn)
Source: Newsmaker.id
