Three factors could contribute to a USD re-appreciation – ING

The US Dollar Index is now trading 8% off its early November high. Economists at ING suspect that the Dollar correction may have run its course, and several factors should allow for some re-appreciation into year-end.

Fed to remain hawkish

“Our suspicion is that the Fed will maintain its hawkish narrative for longer, implicitly or explicitly protesting against the recent drop in yields. After all, endorsing the market’s dovish narrative may be premature and risky for the Fed whose plan should be to let markets do the heavy lifting in tightening – and we are bearish on Treasuries in the near term. A still highly inflationary global environment may struggle to live with sub-3.50% 10-year yields.”

China’s optimism being misplaced

“USD/CNY is trading below 7.00 for the first time since September, with the Yuan following Chinese risk assets higher after the government announced an easing of Covid rules. The government’s move appears to be a direct consequence of recent demonstrations against its Covid policy, but a further untightening of restrictions may prove complicated. At the same time, the real estate and export sectors remain a key concern for the medium outlook in China, and one that may prevent the Yuan from appreciating much further.”

Energy prices rising again

“With Russia rejecting the cap on oil prices at $60/bbl and threatening output cuts, along with a projected drop in temperatures in many parts of Europe, the energy crisis may return and we see ample room for gas and oil prices to climb back. That would be a positive development for the Dollar.”