USD forecast: Dollar hovers at 10-month highs

Dollar hovers at 10-month highs as yields spike on Fed’s higher-for-longer message

The U.S. Dollar index (USDX) remained stable around the 106 mark on Tuesday, maintaining its highest levels in ten months as it followed the upward trend in U.S. Treasury yields as the Federal Reserve (Fed) offered a hawkish outlook on monetary policy due to persistently high inflation.

Although the U.S. central bank decided to keep interest rates unchanged at its September policy meeting, it signaled an upcoming rate hike before the year's end and fewer expected rate cuts in the following year compared to previous projections.

The federal funds rate currently stands in a range from 5.25 to 5.5%, with most policymakers projecting one more 25-basis-point rate increase before the end of the year.

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USD news: Fed comments push up bond yields, DXY

Chicago Fed President Austan Goolsbee suggested on Monday that the central bank might soon reach a point where it can maintain interest rates at a stable level — although a higher than the market is accustomed to.

"The risk of inflation staying higher than where we want it is the bigger risk. We have got to get inflation back down to target... We ought to have 100% commitment,” he added.

Goolsbee said the Fed would need to "play by ear" whether any further rate increases are needed.

He also said the debate over the current phase of Fed policy will “stop being how much more are they going to raise, and transform into well how long do we need to hold rates” at the peak level. The official’s message reiterated the stance adopted by major central banks around the world — borrowing costs will remain “higher for longer.”

Minneapolis Fed President Neel Kashkari also reiterated the higher-for-longer message in a speech at the Wharton School of Business:

"If the economy is fundamentally much stronger than we realized, on the margin, that would tell me rates probably have to go a little bit higher, and then be held higher for longer to cool things off.”

His remarks contributed to a rise in the yield on the 10-year U.S. Treasury — the benchmark for borrowing costs worldwide. On Tuesday, the yield reached 4.566%.

Kashkari mentioned that if inflation follows the expected cooling trend next year, the Fed will be required to lower interest rates to prevent policy from becoming overly restrictive. However, he also expressed his surprise at the resilience of consumer spending despite the previous rate hikes implemented by the Fed.

"Everybody on the Federal Open Market Committee is committed" to bringing inflation back down to the Fed's 2% target, he said. Currently, inflation measured by the Fed's preferred indicator stands at 3.3% as of July.

Investors are now focused on U.S. consumer confidence and home sales data expected on Tuesday to gain further insights into the economy. The dollar has reached multi-month highs against the euro (EUR/USD), pound sterling (GBP/USD), and yen (USD/JPY), and strengthened its position against the Australian (AUD/USD) and New Zealand dollars (NZD/USD).

Dollar forecasts: Analysts see further short-term upside, look to slowdown in 2024

As the dollar probed November 2022 highs after its tenth successive weekly gain, Kit Juckes, Chief Global FX strategist at Societe Generale, offered his take on the greenback’s performance and USD forecast:

Economists at Rabobank voiced similar concerns in their report, pointing towards the likelihood of a U.S. recession, saying that slowdown risks could “take the shine off” the dollar should the American economy decelerate. However, they added that the USD could find support on safe-haven demand triggered by weak global growth:

Analysts at German lender Commerzbank also indicated a potential upcoming dollar correction due to overly optimistic expectations for the U.S. economy:

ING’S Global Head of Markets Chris Turner wrote the steepening of the U.S. Treasury curve was likely driven by two factors:

Economic data aggregator TradingEconomics was bullish on the dollar in its most recent USD forecast, projecting the DXY index to possibly trade at 106.97 by the end of this quarter.

The platform’s 12-month dollar forecast estimated the index to trade at a potential 111.20 by late September 2024.

When considering foreign currency (forex) for trading and price predictions, remember that trading CFDs involves a significant degree of risk and could result in capital loss. Past performance is not indicative of any future results. This information is provided for informative purposes only and should not be construed to be investment advice.