US Dollar: Near-term upside questioned – OCBC

OCBC Bank strategists Sim Moh Siong and Christopher Wong argue that the US Dollar's (USD) structural support from the US technology and AI sectors remains intact, but they are more cautious on further near-term USD gains. Softer labour market data, a more patient Federal Reserve (Fed) stance and already tight financial conditions could see markets reassess aggressive Fed hike expectations, potentially reducing support for the USD.

Structural support but limited upside

"We continue to expect the USD to remain supported by the US economy’s strong exposure to the technology and AI sectors, which have helped sustain growth and productivity. However, after the recent rally, we are becoming more cautious on the scope for further near-term USD gains."

"Recent Fed communication has pointed to a more patient and data-dependent approach to further tightening, even as policymakers remain focused on inflation. Markets are still pricing slightly more than three Fed rate hikes over the next 12 months, which appears aggressive given the emerging signs of labour market moderation."

"If upcoming inflation data confirm that underlying price pressures remain contained, investors may begin to scale back expectations for additional Fed tightening. That could remove an important source of support for the USD."

"Moreover, higher long-term Treasury yields have already tightened financial conditions significantly, reducing the need for the Fed to do all the heavy lifting through policy rates. With financial conditions doing more of the tightening work, the hurdle for further significant Fed hikes remains high."