USD Strengthens Again on FOMC Rate Expectations and US Tech Stocks

The US dollar has strengthened again after a brief period of range trading, driven by expectations of higher Federal Reserve (FOMC) interest rates and possibly increased enthusiasm for US tech stocks.

A key driver of this move is the rise in front-end yields in the US, which prices in more FOMC hikes. This traditional fundamental driver of USD strength has been boosted by the Euro-US 2-year yield spread dipping to its lowest levels since July and heading below -150 basis points.

The EURGBP pair remains relatively stable despite the UK's recent dovish central bank actions, while the Germany-France 10-year yield spread has ballooned wider to its highest levels since the 2010-12 Eurozone sovereign debt crisis. This EUR-negative factor is a concern for markets, as is the rise in short-dated US yields outpacing those of Japan.

The recent surge in US AI-adjacent stocks and record net inflows into US equities may also be contributing to USD strength, but gauging further potential from here is difficult. The market has already priced in significant Fed hikes for next year, making it challenging to see how much more support the USD can gain.