US Dollar: Fragile strength hinges on Fed – Commerzbank

Commerzbank's Thu Lan Nguyen highlights the current weakness of the US dollar, which has reached its lowest level since mid-2025. This decline in the Dollar's strength is attributed to rising US interest rate expectations and a higher likelihood of a Federal Reserve hike in October compared to the European Central Bank. When the Fed raises rates and communicates its intention to tighten monetary policy further, the Dollar tends to maintain its gains.

However, if the Fed raises rates but does not signal further near-term hikes, the Dollar is expected to weaken moderately, as the prevailing rate increases priced by the market would become less certain. Should the Fed maintain stable interest rates, but indicate that the next move may occur in December, the Dollar's reaction will hinge on whether the market simply delays its rate expectations, leading to only temporary pressure on the Dollar, or if the market reassesses the Fed's reaction function and lowers its entire expected rate path, resulting in more substantial downward pressure on the Dollar.

Despite the strength of the Dollar, Thu Lan Nguyen considers it fragile, as it appears overstretched even relative to developments in the Euro Area-US interest rate differential.