Aggresive Fed to underpin the dollar, USD/JPY to soar as high as 125 – ING

Risk flows dominated the financial markets in the second half of the day on Wednesday despite the US Federal Reserve's hawkish policy outlook. Still, economists at ING favour continued dollar strength against the low yielders and commodity FX to outperform.

DXY to push towards 100 near-term

“A risk-on environment is generally seen as a mild dollar negative – as cash leaves from the safety of dollar deposits to be put to work. If this is the case, we would continue to favour the commodity currencies which are enjoying strong terms of trade gains.”

“An aggressive Fed should continue to see the dollar perform relatively well too. Dollar gains, however, should be concentrated against the low-yielders.”

“The clearest trend will be a higher USD/JPY, where a dovish Bank of Japan and Japan's large negative income shock from the fossil fuel rally will send USD/JPY to 120 and possibly 125 later this year. We also think the dollar can hold/build on gains against European FX too.”

“DXY is consolidating near the highs and we would still favour a push to 100 near-term.”