Dollar Rally Hits Policy Limits Ahead of Fed Meeting and US Elections

DBS Group Research economist Philip Wee warns that the US dollar's recent three-week rally may be losing momentum due to shifting monetary policy expectations. Senior Federal Reserve officials have dismissed the idea of another rate hike at the upcoming October 28 FOMC meeting, following softer inflation and employment data. Wee suggests that the rising long-dated Treasury yields, which are driving the dollar's strength, may not be sustainable if they are fueled by concerns over debt supply, fiscal sustainability, and market credibility rather than Fed tightening.

The economist highlights that higher term premia linked to these factors could provide less support to the dollar compared to yields driven by Fed rate hikes. Additionally, the November 3 US midterm elections could further complicate the dollar's outlook. Rising living costs, driven by tariffs, the Iran conflict, and higher borrowing rates, have sparked voter backlash against President Donald Trump's administration. A potential shift in political control could lead markets to reassess the US exceptionalism narrative that has supported the dollar.

Wee argues that the combination of Fed hesitation, fiscal concerns, and political uncertainty may constrain the dollar's upward momentum in the coming weeks.