Fundamentals have aligned for a stronger USD heading into year-end – MUFG

The US Dollar Index (DXY) has strengthened by just over 2.5% from the intra-day low on 3 September as it moves closer to the high from 25 September 2020 at 94.742. In the view of economists at MUFG Bank, the stage is set for further USD strength in near-term but not without reversal risks. 

A gradual grind higher for the US dollar over the coming weeks

“The Fed has signalled that it is planning to tighten policy more quickly than previously anticipated. We expect the Fed to announce QE taper plans at their next meeting in November. It would require evidence of much sharper loss of US growth momentum to delay QE taper plans.”

“We expect further USD upside in the near-term against other major currencies although President Biden’s Fed picks do pose reversal risks. It has been reported that an announcement could be made in the coming weeks.”

“The Fed’s continued hawkish policy shift combined with more persistent upside inflation risks is keeping upward pressure on US yields and the USD. Even after recent hawkish market repricing, the US rate market is still not expecting the Fed funds rate to rise beyond 1.00% by the end of 2023.”