US Dollar: Smile narrative supports gradual gains – OCBC

OCBC Bank strategists Sim Moh Siong and Christopher Wong highlight that the US Dollar (USD) remains supported by its yield advantage and safe-haven status, with FX moves still fitting the USD smile framework. They expect modest USD appreciation by year-end, but notes near-term upside is likely incremental without fresh catalysts, keeping carry trades attractive as funding choices become more important.

Yield support and safe-haven demand

"The USD remains the highest-yielding safe-haven currency in the G10 complex. Near-term FX price action is likely to continue reflecting the "USD smile" framework, under which the greenback tends to outperform when markets price either stronger US growth and higher rates or a rise in global risk aversion."

"While we continue to expect modest USD appreciation by year-end, near-term upside is likely to remain capped without a fresh catalyst. Such an environment should remain supportive of carry strategies, although performance will depend increasingly on the choice of funding currencies."

"Meanwhile, Fed rhetoric continues to lean hawkish. Dallas Fed President Logan argued that "modestly higher interest rates" would provide a better balance of risks around the Fed's dual mandate, adding that a "modest restriction" now would be preferable to a "severe restriction" later."

"That dynamic was evident overnight. While US yields later surrendered part of their gains, the USD remained supported as investors turned more defensive amid renewed Middle East tensions and concerns over a broader unwind in AI-related infrastructure trades."