US Dollar: Rally loses steam with Fed commentary in focus – BBH

The USD rally looks stretched relative to rate differentials as the Dollar Index eases from the highs reached after the October CPI release, according to Brown Brothers Harriman’s (BBH) Elias Haddad. In his view, stagnant US real wages could limit expectations of a 50bps Fed rate hike in December.

Has the USD rally stretched too far in the near term?

"The dollar index (DXY) has pulled back from its highest level since early April 2025, when President Donald Trump unveiled his Liberation Day tariffs. The USD rally was fueled by a sharp repricing in fed funds rate expectations following the hot US October CPI print and amplified by hawkish Fed rhetoric."

"Nevertheless, the USD rally may have run too far, too fast. USD has overshot the level implied by rate differentials, limiting the scope for further gains in the near-term. Moreover, pricing of a jumbo 50bps fed funds rate hike in December will likely be constrained by stagnant US real wages and the resulting headwind to consumption spending."

"Today’s second-tier US data (weekly jobless claims and October existing home sales) are unlikely to move the needle, leaving Fed speakers in focus."

(An editor reviewed this article, which was produced with assistance from an Artificial Intelligence tool. Learn more.)