Despite the recent one-year trade truce between the US and China, risk currencies have not gained the usual lift, with the US dollar continuing to dominate, according to ING FX analyst Chris Turner.
Two key factors keeping the dollar strong:
- Reassessment of Fed easing:
After Fed Chair Jerome Powell’s recent press conference, the probability of a 25bp rate cut in December has fallen to 66%. Upcoming US economic data—including ISM manufacturing, ADP jobs, and possibly JOLTS openings—will be closely watched for signals that could influence the dollar’s trend. - Tight US money markets:
Quantitative tightening and the Treasury’s rebuilding of its cash balance from $300bn to $950bn have reduced liquidity. For example, banks took $50bn in overnight funding from the Fed’s Standing Repo Facility on Friday at 4.00%, near the upper end of the Fed’s target range. Such tight conditions tend to support the dollar.
Market outlook:
- The DXY Index is expected to remain near the top of its three-month range, around 100.00–100.25.
- Any significant improvement in US labor market data could reignite expectations of a December Fed cut, potentially weighing on the dollar.
- Tightness in international dollar funding, such as in cross-currency swaps, could further bolster the greenback, though no signs of stress have emerged yet.
