US Dollar: Policy crosscurrents shape outlook – OCBC

OCBC analysts Sim Moh Siong and Christopher Wong point out that renewed policy uncertainty and Federal Reserve reaction risks are limiting US Dollar gains. Despite higher real yields and a robust US economy, downside remains constrained. The analysts remain neutral on the Dollar over the next one to two quarters, watching Federal Reserve credibility, Jackson Hole guidance, and inflation-fighting commitment.

Renewed policy uncertainty puts the moderately constructive USD view at risk over the short term. Rising real yields, driven by AI-related investment demand and heavy government borrowing, align with a resilient US economy. The economy is strong enough to limit the risk of an overly dovish Fed, which would help contain USD downside.

For now, OCBC prefers to stay neutral on the dollar rather than chase recent weakness. The USD could find support if Fed officials push back against debasement concerns and reaffirm their commitment to the 2% inflation target. Meanwhile, GBP/USD strengthens towards 1.3650 in the European session, while EUR/USD recovers near 1.1700 amid Middle East diplomacy hopes.

Gold struggles below $4,650, but the lack of selling suggests caution before positioning for a price extension. The US Dollar gains momentum after three months of decline, with inflation risks from volatile energy prices keeping interest rate hike expectations alive. Bitcoin rallies above $80,000, supported by institutional demand.

In Asia, trading remains directionless, with uncertainty surrounding Iran and the Federal Reserve outlook following Bessent's comments and ahead of Jackson Hole. Oman's Foreign Minister visits Tehran to discuss the Memorandum of Understanding. Lastly, the US Treasury announces a doubling of liquidity support buyback operations for 10-year to 30-year sectors, effective September 9.