US Dollar: Still no signs of peaking

Forex 5 minutes to read
Charu Chanana

Chief Investment Strategist

Summary:  With the Fed turning markedly more hawkish this week, along with other key central banks such as Bank of England and Norges Bank adding to the list of central banks taking dovish paths, there is potentially scope for another leg higher in the US dollar. A short-term peak in the greenback will only be seen when markets fully price in the Fed path, while a turnaround will have to wait for a shift in US economic data trends. Still, even mounting recession concerns will drive safe-haven flows to US assets.


The strength of the US dollar has been the biggest talk of town this year. After a steady increase since 2008, the USD was already in a strong position at the start of the year, but it has gained a further over 17% year-to-date. Questions like when will the USD peak or has it reached a top have been on investors’ minds, and we have often pushed back on these expectations.

My previous piece on the US dollar highlighted that a few things may need to change before we call it a top in the USD. These included a possible peak in the yield differential between the US and other Developed Markets, or China to part with its zero Covid policies. Both of those factors, for now, have turned further in favour of another bout of USD strength.

Fed’s hawkishness vs. other central banks’ dovishness

Fed Chair Powell surprised hawkish at the FOMC meeting this week, managing to reverse the dovish sentiments that developed following the press release. Pivot hopes were crushed, with the only pivot coming through being hawkish to more hawkish.

Even as the Fed moves to a smaller pace of rate hikes from here, it has guided for a higher terminal rate compared to the median projection of 4.6% as per the September dot plot. This has sprung fresh strength in US yields, with 2-year printing fresh highs of ~4.75% and 10-year yields inching above 4.20% as well. In fact, the doors to 10-year yields reaching 4.75-5% have been opened with Fed’s terminal rate projections now above 5.1%.

This, alone, has the potential to spark a fresh wave of strength in the US dollar. However, to add to the mix, we now have most other DM central banks taking the less hawkish route. This began with the Reserve Bank of Australia stepping down to smaller rate hikes in October, as it highlighted concerns around consumer household budgets. This was followed by dovish hints from the European Central Bank and the Bank of Canada.

The latest ones from yesterday, Norges Bank and Bank of England, also surprised dovish. With expectations split between a 25 or 50bps rate hike, Norges Bank took the dovish path and hiked 25bps despite a deteriorating inflation outlook. Bank of England, despite a 75bps rate hike on Thursday, strongly pushed back against expectations for the scale of future moves, saying that the terminal rate priced in currently by the markets would induce a two-year recession. There were also two dovish dissenters at the meeting, one calling for 50bps rate hike and another for a mere 25bps. Markets are still pricing in more than a 50bps hike for the BOE’s December meeting, but expect this pricing to pare back as we approach December.

This upward re-pricing of the Fed rate path, together with a downward re-pricing of expectations from other DM central banks is clear indication of further room for the USD to run higher.

Source: Bloomberg, Saxo Markets

China’s Zero-Covid won’t disappear overnight

While there was some speculation this week that China could start to consider ways to part with its Zero Covid policy, none of that has been confirmed by the authorities. If we do see the China economy open up, that suggests commodity prices could bump higher as China demand comes back online. That should support the commodity currencies such as AUD and NZD, and also bring in a recovery in the Chinese yuan. But any massive shifts or significant steps to open up the economy are unlikely in the near term, and these will likely remain subtle at best. A dynamic Zero-Covid policy is likely to stay for now, potentially with some flexibility around quarantine requirements or PCR tests.

Recession risks will bring safe-haven flows to the USD

The US economy still remains in a position of strength, with a strong labor market and significant household savings. This, in comparison to rising recession fears in the EU and the UK, suggest that capital flows will continue to be fuelled towards the safety of US assets. Even if we see a mild recession in the US, markets will be scrambling for liquidity which is usually found in US dollar or the US Treasuries. A temporary peak may be seen in the USD later in Q4 or early Q1 as Fed’s upward pricing reaches a peak, but still, a turnaround in the USD will be slow and stretched.

What causes the turnaround?

In the short run, a peak in USD would be a result of a near peak in pricing in the Fed rate path. But a more sustainable trend lower will have to wait for US economic data to show a materially different trend. Say core PCE down to 0.1-0.2% MoM levels or labor market materially cooling with NFP gains down to about 100k or so.

Asian FX to continue to face headwinds

Another leg higher in the USD will mean further pressure on Asian FX, especially the Chinese yuan which is facing policy divergence to the Fed and a slowing economy at home. Other tech-exposed currencies like the Korean won (KRW) and Taiwanese dollar (TWD) may be under greater pressure as well, although relative resilience can be expected for the safe-haven Singapore dollar (SGD). The Indonesian rupiah (IDR) will also likely be supported if Bank Indonesia adopts a fast pace of tightening, as a favourable current account situation also lends support.

Investment inspiration to consider

Long USD and short risk assets is perhaps still the most favourable strategy. We previously listed out tools that can be used to go long US dollar here. In the FX space, this can be traded using options as well with potential short positions on GBP, EUR, TWD, KRW.

Also, consider that upward pricing of Fed’s rate path from here can mean short-term headwinds for Gold and Silver. We still expect medium-term upside in precious metals, however, as inflation expectations remain anchored higher in the new deglobalized world.

Meanwhile, a lower pace of Fed rate hikes from here could reduce volatility in the interest rate markets, so watch the MOVE index. This could potentially lower the volatility in the FX markets as well. We believe a peak in bond volatility will be the key, and the first sign, for the markets to reverse trend.

Quarterly Outlook

01 /

  • Macro Outlook: The US rate cut cycle has begun

    Quarterly Outlook

    Macro Outlook: The US rate cut cycle has begun

    Peter Garnry

    Chief Investment Strategist

    The Fed started the US rate cut cycle in Q3 and in this macro outlook we will explore how the rate c...
  • Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Quarterly Outlook

    Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Althea Spinozzi

    Head of Fixed Income Strategy

  • Equity Outlook: Will lower rates lift all boats in equities?

    Quarterly Outlook

    Equity Outlook: Will lower rates lift all boats in equities?

    Peter Garnry

    Chief Investment Strategist

    After a period of historically high equity index concentration driven by the 'Magnificent Seven' sto...
  • FX Outlook: USD in limbo amid political and policy jitters

    Quarterly Outlook

    FX Outlook: USD in limbo amid political and policy jitters

    Charu Chanana

    Chief Investment Strategist

    As we enter the final quarter of 2024, currency markets are set for heightened turbulence due to US ...
  • Commodity Outlook: Gold and silver continue to shine bright

    Quarterly Outlook

    Commodity Outlook: Gold and silver continue to shine bright

    Ole Hansen

    Head of Commodity Strategy

  • FX: Risk-on currencies to surge against havens

    Quarterly Outlook

    FX: Risk-on currencies to surge against havens

    Charu Chanana

    Chief Investment Strategist

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperfo...
  • Equities: Are we blowing bubbles again

    Quarterly Outlook

    Equities: Are we blowing bubbles again

    Peter Garnry

    Chief Investment Strategist

    Explore key trends and opportunities in European equities and electrification theme as market dynami...
  • Macro: Sandcastle economics

    Quarterly Outlook

    Macro: Sandcastle economics

    Peter Garnry

    Chief Investment Strategist

    Explore the "two-lane economy," European equities, energy commodities, and the impact of US fiscal p...
  • Bonds: What to do until inflation stabilises

    Quarterly Outlook

    Bonds: What to do until inflation stabilises

    Althea Spinozzi

    Head of Fixed Income Strategy

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain ...
  • Commodities: Energy and grains in focus as metals pause

    Quarterly Outlook

    Commodities: Energy and grains in focus as metals pause

    Ole Hansen

    Head of Commodity Strategy

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities i...
Disclaimer

The Saxo Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-hk/legal/disclaimer/saxo-disclaimer)

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo or its affiliates.

Saxo Capital Markets HK Limited
19th Floor
Shanghai Commercial Bank Tower
12 Queen’s Road Central
Hong Kong

Contact Saxo

Select region

Hong Kong S.A.R
Hong Kong S.A.R

Saxo Capital Markets HK Limited (“Saxo”) is a company authorised and regulated by the Securities and Futures Commission of Hong Kong. Saxo holds a Type 1 Regulated Activity (Dealing in Securities); Type 2 Regulated Activity (Dealing in Futures Contract); Type 3 Regulated Activity (Leveraged Foreign Exchange Trading); Type 4 Regulated Activity (Advising on Securities) and Type 9 Regulated Activity (Asset Management) licenses (CE No. AVD061). Registered address: 19th Floor, Shanghai Commercial Bank Tower, 12 Queen’s Road Central, Hong Kong.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products may result in your losses exceeding your initial deposits. Saxo does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo does not take into account an individual’s needs, objectives or financial situation. Please click here to view the relevant risk disclosure statements.

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-hk/about-us/awards.

The information or the products and services referred to on this site may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and services offered on this website are not directed at, or intended for distribution to or use by, any person or entity residing in the United States and Japan. Please click here to view our full disclaimer.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc. Android is a trademark of Google Inc.