US Dollar: Fed support seen fading – Commerzbank

Commerzbank’s Antje Praefcke notes that while the Federal Reserve’s (Fed) unanimous rate hike and hawkish tone have supported the Dollar, markets already discount further tightening of about 75 basis points by mid-2027. She argues that sustained hawkish communication is needed to defend current US Dollar (USD) levels, but sees downside risks if rate expectations are revised lower or political conflict over monetary policy emerges.

Fed rhetoric key for Dollar resilience

"Yes, the Fed unanimously raised interest rates. And yes, it sounded hawkish last week, so further moves could follow. But for the dollar to defend its gains, I think more needs to come."

"Since the market has already priced in significant interest rate hikes (+75 basis points till July 2027), these expectations must be kept running in order to avoid losses in the USD. Giving the greenback another boost upward is even much more difficult."

"Our experts also expect that while the Fed will take one more step in December, that will be the end of it, as the conflict in the Middle East is likely to slowly subside and energy prices are expected to fall along with it."

"However, if the market has to revise its interest rate expectations downward, that would suggest a downward correction in the dollar. And then there’s the US president, who could increasingly criticize the Fed’s monetary policy."

"Therefore, it would be worth a thought using the current dollar levels as favorable opportunities for hedging, as I think the risks that the dollar could lose ground again outweigh the upside potential."

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