The dollar bulls are unlikely to get toppled anytime soon as the Federal Reserve will likely follow up its widely expected interest rate hike with hawkish remarks this week that may force traders to rethink how high rates could go before peaking.
The U.S. dollar index, which measures the greenback against a trade-weighted basket of six major currencies, fell by 0.1% to 109.44, though it remains close to its highest level since 1985.
“[W]e see the dollar staying at these strong if not stronger levels for the rest of the year,” ING said, flagging the upside risk of the market pricing in more aggressive Fed monetary policy tightening.
The Federal Open Market Committee, the Fed’s rate-setting arm, will kick off a two-day meeting Tuesday that is expected to culminate in a decision to raise the benchmark rate by 0.75%.
The decision will be accompanied by a fresh set of projections on inflation, economic growth and the future path of interest rates that will collectively indicate a more hawkish path to restrictive territory.
The Fed’s prior projections in June showed the central bank’s terminal or peak rate was around 3.8%, but markets are now expecting the Fed to lift that to about 4.5% and may lay out the carpet for a push to about 5% if inflation doesn’t slow fast enough.
Bets on the Fed lifting its benchmark rate to a peak of 5% “cannot be ruled out over the coming months,” ING said, highlighting the risk of the market reassessing the Fed’s plan to move into restrictive policy and data potentially showing red-hot inflation.
Acknowledge that the recent inflation data aren’t showing enough of a slowdown in price pressures, ING said, the Fed’s subsequent meetings in November and December could therefore see “more aggressive action from the Fed” than it is currently forecasting.
About 60% of traders now expect the Fed to hike another 75 basis points in June, compared with just 16% the prior week, according to Investing.com’s Fed Rate Monitor Tool.
For the December meeting, consensus isn’t yet clear, but another 25 basis point hike appears to be offing, taking the Fed’s funds rate to a range of 4.25% to 4.50%.