US Dollar: Risks tilt further to the downside ahead of FOMC – Scotiabank

Sentiment continues to underpin the US Dollar (USD) despite softer interest rate differentials, according to Scotiabank strategists Shaun Osborne and Eric Theoret. With the US Dollar Index (DXY) moving further away from fair value, they see risks tilted towards USD weakness if Wednesday's Federal Reserve (Fed) decision is neutral and acknowledges disinflationary trends.

Could risk appetite weigh on the Dollar outlook?

"G10 currencies are mixed with a relative performance distribution that is suggestive of mild risk appetite in overall quiet trade."

"Rate expectations are muted, with 3bpts of tightening priced for tomorrow and 22bpts expected for December."

"We note the widening gap between the DXY (102.2 spot) and our FV estimate (100.5), reflecting recent sentiment-related support to the USD as interest rate differentials have softened and eroded its fundamental support."

"A neutral hold would leave risk for the USD tilted firmly to the downside, as policymakers could easily endorse the disinflationary trends previously highlighted among the narrower measures of inflation."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)