The Dollar is going into the September Fed meeting at the strongest levels since March. Economists at ING analyze USD outlook.

Few reasons for Dollar to hand back gains, yet

The concept of US ‘exceptionalism’ (both in growth and interest rates) looms large over the market and as yet there have been few reasons to bet against the Dollar.

The event risk of the September FOMC meeting does not seem a particularly bearish one for the Dollar. We are not expecting the Fed to call time on its tightening cycle. And by leaving one more hike in the dot plot, the Fed can avoid yields at the long end of the bond market slipping too far and providing premature stimulus. Indeed, the greater risk might be the Fed scaling down its dot plot median forecast of a 100 bps easing cycle in 2024.

A hawkish September FOMC does not mean the USD has to rally a lot. But assuming there are no surprises, it probably means ideas of a prolonged pause in the policy cycle will see interest rate volatility fall even further and demand for the carry trade stay strong.