US Dollar Outlook

1-3 Month Outlook

Higher, but not much USD fell steadily into the September 17 FOMC meeting, making a low after the unchanged rate decision, then spent the rest of the month recovering to end unchanged - both in DXY-terms and bilaterally against all of the major currencies. With September 17 behind us, the debate has now shifted to whether the Fed hikes at either of the two remaining meetings this year (Oct 28 or Dec 16). 

With insufficient new news by this month's meeting, the "live" meeting is December and the ~35% probability of a hike currently discounted is very similar to expectations for the September meeting, 2½ months prior to the event. So the start of Q4 is in many respects similar to the start of Q3 - the US domestic data are fine (notwithstanding one month's poor payrolls), economic surprises are balanced and the next important Fed meeting is priced as being in the balance. How USD trades for the rest of the year will largely be a reflection of how this probability evolves. Fed comments subsequent to the FOMC have consistently suggested a "default" position of a hike this year, the onus being on the news-flow to stop the Fed moving and this has continued after the disappointing September payrolls report. 

6-12 Month Outlook 

Moderately bullish There is still a widespread view that USD rallies ahead of the first Fed hike and sells off after. While this holds on average, the degree of dispersion suggests it would be unwise to rely on it. The US is better placed than most countries to shoulder currency appreciation. Global demand is a more important driver for US export growth than the level of USD. And because much of global trade is denominated in USD, the US sees lower exchange rate pass-through than other countries (a recent academic study estimates it is a quarter to a third of pass-through in EM countries). That means both on the growth and the inflation front, USD has room to rise.