US Dollar: Hawkish risks keep support – OCBC

OCBC strategists Sim Moh Siong and Christopher Wong note the US Dollar (USD) stayed broadly steady as AI-related risk appetite returned and Oil prices eased. They expect the Federal Reserve (Fed) to hold rates in October, with focus shifting to December. Hawkish Fed risks, US midterms, AI policy and Iran conflict are seen keeping the Dollar supported but with more two-way volatility.

Fed stance and politics shape Dollar

"The USD was broadly steady overnight as appetite for AI-related risk returned and oil prices eased. The AI tailwind could fade in 2027, but we think it is still too early to position for a weaker USD on an AI downturn. For now, hawkish Fed risk should keep the USD supported, although the trade is becoming less one-way."

"We expect the Federal Reserve to stay on hold in October, with the focus shifting quickly to December. September CPI surprised to the upside, while most FOMC participants had already indicated that another hike could be appropriate by year-end."

"Beyond the Fed, the US midterms are the next major political risk for the USD. Republicans retaining unified control would probably deliver the clearest USD-positive surprise, given that markets currently strongly favour Democrats taking the House and see them as modest favourites for the Senate."

"A divided government would likely constrain further fiscal expansion and could therefore be broadly neutral for the USD. Beyond the immediate election outcome, the bigger question is how policy shifts on AI and the Iran conflict affect US growth, inflation and risk sentiment. These forces can pull the USD in different directions, reinforcing our view that the dollar remains supported but is no longer a one-way trade."