Dollar Strength Ahead of FOMC Decision Sparks Shift in Funding Currency

The US dollar has been trading firmly ahead of the Federal Reserve's (Fed) policy decision, despite limited movement in Treasury yields. This suggests that foreign exchange traders are taking the risk of a hawkish Fed seriously.

The Fed does not necessarily need to hike interest rates to support the dollar; it only needs to keep the possibility of further tightening alive.

Lower oil prices should help Europe by reducing its energy burden and improving the region's terms of trade, but EUR/USD is receiving almost no benefit due to the market's focus on the policy gap between the Fed and the European Central Bank.

The Swiss franc may replace the yen as the preferred funding currency, with the SNB potentially keeping its policy rate unchanged at 0.00% until the end of 2027.