US Dollar: Support underpinned by hawkish risks – OCBC

The US Dollar (USD) remained broadly steady. OCBC strategists Sim Moh Siong and Christopher Wong attribute this to renewed appetite for AI-related risk and easing Oil prices. In their view, the Federal Reserve (Fed) will leave rates unchanged in October, shifting attention to December. They see hawkish Fed risks, the US midterms, AI policy and the Iran conflict underpinning the Dollar, but with greater two-way volatility.

Dollar Support: Fed Outlook and Political Risks

"The USD was broadly steady overnight as appetite for AI-related risk returned and oil prices eased. The AI tailwind could fade in 2027, but we think it is still too early to position for a weaker USD on an AI downturn. For now, hawkish Fed risk should keep the USD supported, although the trade is becoming less one-way."

"We expect the Federal Reserve to stay on hold in October, with the focus shifting quickly to December. September CPI surprised to the upside, while most FOMC participants had already indicated that another hike could be appropriate by year-end."

"Beyond the Fed, the US midterms are the next major political risk for the USD. Republicans retaining unified control would probably deliver the clearest USD-positive surprise, given that markets currently strongly favour Democrats taking the House and see them as modest favourites for the Senate."

"A divided government would likely constrain further fiscal expansion and could therefore be broadly neutral for the USD. Beyond the immediate election outcome, the bigger question is how policy shifts on AI and the Iran conflict affect US growth, inflation and risk sentiment. These forces can pull the USD in different directions, reinforcing our view that the dollar remains supported but is no longer a one-way trade."

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