Dollar Steady as Carry Trades Persist

The US dollar is holding steady in early Asian trading due to carry trades remaining supported as the Federal Reserve is expected to keep interest rates unchanged at its upcoming policy meeting, according to OCBC strategists.

This dynamic has kept the interest rate differential between the US and other major economies relatively wide, making the dollar an attractive funding currency for carry trades. In a carry trade, investors borrow in a low-yielding currency like the dollar and invest in higher-yielding assets elsewhere, profiting from the spread.

OCBC notes that the market has fully priced in a hold at the next Federal Open Market Committee meeting, with futures indicating a high probability of no change. This expectation has been reinforced by recent economic data showing a resilient labor market but cooling inflation, giving policymakers little reason to adjust rates.