Dollar Rally Shows Signs of Exhaustion as Scandinavia Eyes Rate Hikes
The dollar rally has accelerated, breaking above 101.0 on the DXY index. The strong US PMIs, higher oil prices, and soft risk sentiment have contributed to this bullish narrative, but it may be looking stretched relative to fundamentals.
We are cautious about calling for a bottom in the dollar just yet because any upside surprise in upcoming US data releases can prompt markets to fully price in an October Fed hike. This could further prop up short-term rates and lead to a correction in DXY, potentially returning to the 100-100.5 area.
The USD/JPY pair remains another source of potential downside risk for the dollar. The rapid rally may draw Japanese authorities to intervene, which could spill over into a weaker USD across the board.
Fed speakers Williams, Barkin, Hammack, and Paulson will deliver remarks today, keeping Fedspeak on investors' radar. Meanwhile, President Trump's summit with Chinese leader Xi Jinping is also expected to be closely watched for any potential impact on the dollar.
In Scandinavia, the Riksbank is expected to deliver a hawkish hold, hinting at an imminent rate hike in November. Norges Bank may raise interest rates by 25bps, and NOK has more upside potential than SEK due to market and consensus being more split about the decision.