Dollar Rally Takes Hold as Fed Hawkishness Reigns Supreme
The EUR/USD exchange rate has been stuck in a tight range of 1.13-1.18 due to US policy settings, which are influenced by the Federal Reserve's communication on interest rates under new Chair Kevin Warsh.
According to ING, the recent shift in their house view to a September rate hike supports short-dated US yields above 4.00%, keeping the dollar broadly supported into year-end. As a result, they have lowered their EUR/USD forecast for year-end from 1.18 to 1.16 and raised their USD/JPY target to 160 from 158.
The Fed's hawkish stance is expected to dissuade investors from the debasement trade, which has favored assets like the Swiss franc, gold, and Bitcoin over the dollar since 2025.
However, if long-end US Treasury yields surge through 5.50%, steepening the yield curve, it could weigh on the dollar, leading to a generalized rise in volatility and potentially unnerve carry trade positions in high-yield FX.