US Dollar Hits New Highs Despite Dimming Fed Hike Hopes

The US Dollar Index (DXY) is reaching new highs near 102.50 this year, driven by the euro's weakness and the Federal Reserve's relatively firm stance. However, expectations for a Fed rate hike in October have faded due to recent softer inflation and payrolls data, raising questions about the dollar's momentum.

Philip Wee of DBS Group Research warns that the dollar's rally may be losing steam as Fed officials signal caution about an October rate hike. He notes that rising long-term Treasury yields, fueled by fiscal deficits and debt issuance, provide weaker support for the dollar than central bank tightening. Wee also highlights the upcoming US midterm elections as a potential risk factor.

Meanwhile, Chris Turner of ING takes a more optimistic view, attributing the dollar's strength to the euro's decline, which makes up 58% of the DXY basket. Turner expects the Fed's rate path to remain more resilient than that of the European Central Bank, supporting the DXY toward a target of 102.85.

The key takeaway is that the dollar's rise is supported by central bank divergence and overseas weakness, particularly in the Eurozone. While some warn of political and fiscal risks, others believe the dollar will stay well-supported through year-end due to relative monetary policy strength.