US Dollar Sees Moderate Rally Into Year-End Amid Fed Uncertainty

The US Dollar (USD) has begun the fourth quarter of 2026 on a strong note, according to strategists Sim Moh Siong and Christopher Wong from OCBC. They attribute this stability to robust US economic growth and the potential for a more hawkish stance from the Federal Reserve (Fed). However, they anticipate only a modest USD rally as markets adjust their expectations for near-term Fed rate hikes.

Despite recent hawkish Fed signals and energy-related shocks, USD gains have been controlled rather than chaotic. The strategists note that bond market volatility is increasingly influencing currency markets. If bond volatility remains high, it could put pressure on carry trades, cyclical currencies, and the Euro (EUR), while traditional safe-haven currencies like the Swiss Franc (CHF) and the USD may continue to find support.

OCBC’s base case scenario envisions a moderate USD rally into year-end. Markets have significantly reduced the likelihood of an October Fed rate hike after several Fed officials indicated a cautious approach, preferring to assess more data before acting. Still, markets are pricing in about three rate hikes over the next year.

The strategists caution that if upcoming inflation data shows contained price pressures, markets may further scale back Fed tightening expectations, which could limit additional USD upside.