Even if we still expect the dollar to turn lower by early 2024, USD upside risks remain material in the near term after the Fed surprised with more ha
wkish dot plots than market pricing. That may look like a reboot of June’s market conditions, but this time, the room for hawkish repricing in US short-termThis week marks the conclusion of the third quarter. The US dollar has exhibited strength throughout the summer, appreciating against all G10 currencies except the Norwegian krone . As we assess the near-term, it appears unlikely that this trend will shift.
Back in June, when the Federal Reserve presented more hawkish dot plots compared to market expectations, I highlighted a significant upside risk for the dollar. Unless economic data starts indicating a slowdown, markets would eventually need to align themselves with the FOMC's projections. Although the current situation resembles that of June, the gap between the dot plot and market pricing has narrowed.
At present, markets are pricing in an end-2024 Fed rate of 4.67% , implying a 65-basis point reduction from current levels. If the 2023 rate hike, as indicated in the Fed dot plots, is not ultimately realized, the theoretical median 2024 rate projection would decrease to 4.85%. This leaves approximately 20 basis points of potential repricing room shouldComparing the current scenario to June, the gap between market expectations and dot plot projections was much wider.
I continue to emphasize the likelihood of more near-term upside risks for the dollar, as evidence of a slowdown in US economic activity may take longer to materialize. However, I anticipate that such evidence will eventually emerge, leading to a significant dovish repricing in US interest rates and a sharp decline in the dollar in 2024.
This week is expected to be relatively quiet in terms of US economic data releases, with the focus primarily on speeches from Federal Reserve officials. Neel Kashkari, known for his hawkish views, is anticipated to support another rate hike and possibly oppose rate cut expectations. Later in the week, we will also hear from Fed Chair.
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