US Dollar: Structurally stronger after Fed hike – ING

ING analysts Francesco Pesole and Frantisek Taborsky observe that the US Dollar now enjoys a stronger foundation following the Federal Reserve's recent 25 basis point rate hike and their prediction of additional rate hikes this year. The US Dollar Index (DXY) has reached a two-month peak, buoyed by rising oil prices and the Federal Reserve's disciplined policy approach. However, their projection for the near term still envisions a stabilization and eventual softening of the Dollar by year-end.

The recent Federal Open Market Committee (FOMC) meeting was notably hawkish, with a 25 basis point increase accompanied by a strong consensus among members for further hikes throughout the year. Twelve members projected a single hike, while four expected two more increases. Despite higher growth and inflation projections and lower unemployment, Chair Kevin Warsh reaffirmed the Fed's commitment to price stability, indicating no immediate restriction on policy.

In response to the hawkish expectations, the two-year USD swap rate jumped by 10-12 basis points, with market pricing for October at 13 basis points and December at 32 basis points. The Dollar rallied broadly, with the DXY up 0.6% and at a two-month high. ING believes the policy boost has been fully absorbed, but risks remain tilted to the upside in the near term due to the potential for further rate hikes, the justified pricing of the next move, and the supportive effects of higher oil prices.

While ING's baseline forecast anticipates stabilization around current ranges, with a softer Dollar toward year-end, this outlook heavily depends on de-escalation in the Middle East. As long as oil prices remain elevated, the bullish momentum for the Dollar remains strong.