US Dollar Set for Moderate Rally into Year-End Amid Bond Volatility
OCBC strategists Sim Moh Siong and Christopher Wong note that the US Dollar (USD) has begun the fourth quarter of 2026 on a strong note, supported by robust US economic growth and the likelihood of a hawkish Federal Reserve (Fed). They anticipate a moderate USD rally into year-end, as markets reassess the near-term prospects of Fed rate hikes and bond-market volatility increasingly influences currency dynamics.
The strategists highlight that while the USD has benefited from resilient US growth and hawkish Fed risks, the broader narrative revolves around the spillover of bond market volatility into foreign exchange (FX) markets. Elevated rate volatility is expected to sustain pressure on carry trades, cyclical currencies, and the Euro (EUR), while traditional safe-haven currencies like the Swiss Franc (CHF) and the USD should remain supported.
OCBC’s base case foresees a moderate rather than aggressive USD rally into year-end. Market expectations for an October Fed rate hike have diminished following signals from Fed officials that they prefer to assess additional data before tightening policy further. However, markets still anticipate roughly three rate hikes over the next 12 months.
If upcoming inflation data indicates contained underlying price pressures, markets may further scale back Fed tightening expectations, potentially limiting additional USD upside.