US Dollar: Rally durability questioned – DBS

DBS Group Research economist Philip Wee questions the durability of the US Dollar's rally after it initially surged following hotter-than-expected US CPI data. Wee points out that both the Dollar and US Treasury yields have since retreated as markets factor in potential Federal Reserve tightening risks. The DXY Index also failed to maintain its recent gains, raising concerns about the rally's sustainability.

Growing worries over US growth, earnings, and political uncertainty are further weighing on equity markets and the broader Dollar rally. The reversal in Treasury yields and Fed hike expectations indicate that investors are concerned about the potential growth and earnings impacts of additional tightening. Adding to the headwinds, political uncertainty is a factor as the midterms approach, with prediction markets now indicating a potential Democratic sweep of Congress.

This scenario could lead to tighter regulatory scrutiny, policy gridlock, and a risk to elevated equity valuations. Meanwhile, AUD/USD remains pressured, trading near the 0.6900 level ahead of Asian markets open. The Australian Dollar has found no respite from discouraging labor market data, struggling to benefit from the recent Dollar retreat.

USD/JPY also continues to slip from a three-week high, attracting sell-off and sliding below 158.00 in Thursday's Asian session. Traders are on high alert as speculation grows that authorities may intervene to support the Japanese Yen. Despite the Dollar's decline, gold has rebounded, reaching the $4,170 region per troy ounce on Thursday, driven by fresh bullish sentiment towards the Dollar and falling Treasury yields.

The precious metal's gain comes as investors remain cautious ahead of the Federal Reserve Chair Jerome Powell's speech on Friday.