US Dollar: Holds gains as Fed pricing stays firm – ING

ING’s Chris Turner notes the US Dollar (USD) remains supported as investors focus on French fiscal risks and repricing of European Central Bank (ECB) tightening versus a more resilient Fed path. He highlights the US Dollar Index (DXY) pushing to new yearly highs, with 102.85 as the next upside level, and says unchanged Fed policy in October followed by a December hike is now comfortably priced.

DXY targets new yearly highs

"DXY dollar index is pushing smartly to new highs of the year. It is being propelled by the sell-off in the euro, which represents 58% of the DXY basket. 102.85 would seem to be the next upside target here."

"Friday's softish September jobs data failed to materially dent prospects for the dollar. Instead, it seems the market is pretty comfortable pricing in unchanged Fed policy at the late October meeting and then a hike at the December meeting. In terms of how this week will play out for short-dated US rates, the focus will probably be on today's ISM services data and then the release of the FOMC minutes on Wednesday evening."

"Both look positive for the dollar, with the latter providing some colour on why so many Fed members were forecasting a second Fed hike this year in their Dot Plot submissions."

"Core support for the dollar should continue to come from the fact that expectations for the monetary policy tightening cycle remain far more resilient for the Fed than for overseas central banks – especially the ECB. Since late September, 30bp has been removed from the ECB's expected tightening cycle compared to just 13bp for the Fed."

"Independent euro weakness is the dominant story in FX markets as investors adjust positions for French fiscal risk. With the ECB tightening cycle far more vulnerable to repricing than the Fed's, EUR/USD looks set to remain under pressure."