US Dollar: Fed hawkish hold fails to extend gains – DBS

DBS Group Research economist Philip Wee states that the Federal Reserve's cautious approach to rate hikes did not sustain the dollar's upward momentum, even as US Treasury yields surged. Wee mentions Kevin Warsh's guarded comments on future rate increases and the significance of forthcoming PCE inflation and Q2 2026 GDP figures.

Wee believes that steady economic growth combined with slowing inflation could cast doubt on market projections for multiple Federal Reserve rate hikes in 2027. The Fed's measured stance did not prove sufficient to maintain the dollar's rally. The discrepancy between a weaker dollar index and higher US Treasury yields was particularly striking.

Fed Chairman Kevin Warsh's absence of a commitment to a December rate hike leaves market participants dependent on the upcoming PCE inflation and Q2 2026 GDP data for direction. While headline figures may be higher, market participants may closely examine the underlying components of inflation and growth. September's headline PCE inflation is projected to rise to 3.6% year-over-year (0.5% month-over-month) from 3.4% year-over-year (0.3% month-over-month) in August, while core inflation is expected to increase marginally less at 3.1% year-over-year (0.3% month-over-month) from 3.0% year-over-year (0.2% month-over-month).

The advance estimate for Q2 2026 GDP growth is anticipated to accelerate to an annualized 3.2% quarter-over-quarter, up from 2.2% in Q1 2026, while personal consumption expenditures are projected to decelerate to 3.4% from 3.8%. A synergy of robust growth and decelerating inflation should prompt a reevaluation of the numerous 2027 Fed rate hike forecasts.