US Dollar: Carry-supported but rangebound near term – OCBC

OCBC’s Sim Moh Siong and Christopher Wong highlight that still-attractive US Dollar (USD) carry and softer United States (US) data, which have reduced the odds of a September Fed hike, should keep the Dollar rangebound. They argue that as long as long-end US yields do not rise significantly further, risk assets and carry trades should stay supported. Markets now focus on the July FOMC minutes for clarity on Fed inflation views and rate intentions.

Fed expectations and carry trades

"Oil, yields and geopolitics are keeping markets on edge. Still, reduced Fed tightening expectations should keep the USD rangebound and preserve support for carry trades."

"The combination of still-attractive USD carry and a pause in the USD's bullish momentum, following softer US economic data that has reduced the likelihood of a September Fed hike, should keep the greenback rangebound in the near term."

"Provided long-end US yields do not rise significantly further, the broader risk backdrop should remain supportive of carry trades."

"This week's key event is the release of the July FOMC minutes. Markets will look for greater clarity on policymakers' inflation views and the extent of support for keeping rates unchanged, beyond the three regional Fed presidents reportedly favouring higher rates."

"While the minutes have been partly overtaken by softer July labour market and inflation data, they remain important given the Fed's limited forward guidance on interest rates."