101.00 DXY: Why institutional banks see the US Dollar staying supported

Institutional bank commentary points to a US Dollar that has recently strengthened on FOMC-related rate repricing and could remain supported, particularly against low-yielding currencies, as long as energy prices stay elevated and Fed hawks remain active. However, if inflation pressures stay contained, some banks see scope for market expectations of further Fed hikes to be scaled back, which could reverse the latest USD gains.

HSBC: USD lifted by a more divided FOMC and rate repricing

HSBC highlights that “The FOMC is more divided than the market had anticipated, and the US dollar has risen on the resulting rate repricing.” This suggests that greater perceived policy uncertainty and a reassessment of the Fed’s path have already translated into a stronger Dollar, with the market reacting to the possibility of less dovish outcomes than previously assumed.

"HSBC: The FOMC is more divided than the market had anticipated, and the US dollar has risen on the resulting rate repricing."

DBS: Shift in FOMC communication reduces explicit easing bias

DBS notes that at the June 16-17 FOMC meeting, Warsh “pivoted away from forward guidance by radically shortening the FOMC statement, stripping out the Committee’s previous easing bias and language detailing the balance of risks.” This change in communication removes earlier emphasis on easing, reinforcing the perception that the Fed is less inclined toward additional accommodation, a backdrop that supports the recent firming in the US dollar.

"DBS: At the June 16-17 FOMC meeting, Warsh pivoted away from forward guidance by radically shortening the FOMC statement, stripping out the Committee’s previous easing bias and language detailing the balance of risks."

MUFG/BTMU: Contained inflation could unwind the USD rally

MUFG/BTMU cautions that “If underlying inflation pressures remain contained, it could prompt market participants to scale back expectations for Fed hikes, resulting in a reversal of the recent USD rally.” Their view introduces a conditional downside scenario for the dollar, where softer inflation dynamics would lead investors to reassess the need for further tightening and potentially unwind the latest strength in the currency.

"MUFG/BTMU: If underlying inflation pressures remain contained, it could prompt market participants to scale back expectations for Fed hikes, resulting in a reversal of the recent USD rally."

ING: Higher energy prices seen keeping USD supported on dips

ING argues that “higher energy prices will provide fuel for the Fed hawks and keep the dollar supported on dips – particularly against the low yielders.” With DXY “trading around 101.00” and ING favoring “it back to the 101.50 area,” their stance underscores a bias toward a modestly stronger Dollar, especially versus currencies with lower yields, as long as energy-related pressures sustain a more hawkish tone within the Fed.

"ING: Our bias is that higher energy prices will provide fuel for the Fed hawks and keep the dollar supported on dips – particularly against the low yielders."

The takeaway

Across the institutional commentary, the US dollar is currently supported by a more divided FOMC, reduced explicit easing bias, and higher energy prices that bolster Fed hawks, with some banks expecting DXY to edge higher from current levels. The main risk to this constructive USD tone, highlighted by MUFG/BTMU, is that contained underlying inflation could lead markets to pare back Fed hike expectations and potentially reverse the recent dollar rally.