Federal Reserve's hawkish expectations combined with oil price rebound keep the US dollar strong
- On Tuesday, the US dollar maintained a firm trend in the foreign exchange market, with the US Dollar Index currently trading near 101.00, not far from last Friday’s over one-year high of 101.12. Traders widely expect the Federal Reserve to take a more hawkish monetary policy stance, while oil prices rebounded after a sharp decline, jointly providing support for the dollar.
- US Treasury yields continued to remain elevated after jumping on Monday. The two-year Treasury yield, which is sensitive to interest rate outlook, hovered near a 16-month high, reflecting growing market expectations that the Federal Reserve may raise rates later this year.
- Federal funds futures data show that the probability of a rate hike in September has risen to 75%. Bank of America Global Research and Deutsche Bank have both abandoned their previous forecasts that policy would remain unchanged, now expecting the Federal Reserve to raise rates within the year, mainly based on the strong resilience shown by the US economy.
- OCBC foreign exchange strategist Sim Moh Siong pointed out that, driven by rising yields and market bets on the Federal Reserve’s hawkish stance, the dollar remains firm. Due to limited policy guidance from the Federal Reserve, market volatility has intensified. The bank now expects the dollar to strengthen slightly, revising its earlier forecast that the dollar would fluctuate within a range.
- The strategist further stated that, if the US Dollar Index clearly breaks through the 14-month high of 101.97, it could rise another 2% to 3%.
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