Dollar: Crosscurrents in Policy Shape Outlook – OCBC

The US dollar index is currently trading near 99.07, with a mix of bullish and bearish factors leaving its outlook uncertain. OCBC analysts Sim Moh Siong and Christopher Wong believe that while the relative resilience of the US economy and higher real yields limit the dollar's downside, resurgent policy uncertainty and concerns over the market's reaction to Federal Reserve policy are emerging as key constraints on dollar gains.

**Policy Risks and Fiscal Concerns Weigh on the Dollar**

Uncertainty over US trade policy has risen notably recently. According to reports, US President Donald Trump has previously threatened to impose tariffs on the European Union and proposed new tax demands on tech product manufacturers, moves that have intensified market worries about the economic impact of protectionism. Meanwhile, US fiscal sustainability has also come under question. Per market reports, the passage of a major tax reform bill, coupled with rating agency Moody's recent downgrade of the US, has amplified concerns over the nation's debt-servicing capacity. Related estimates suggest the bill could add trillions of dollars to the already massive federal debt over the next decade, potentially pushing the fiscal deficit ratio to 7%, which undermines the dollar's safe-haven foundation as a reserve currency.

**Hawkish Rate Expectations and Limited Dollar Strength**

Although the Federal Reserve's hawkish stance provides underlying support for the dollar, that support appears to be offset by other factors. Some analyses note that the real yield on the US 10-year Treasury has recently climbed above 2.0%, which theoretically favors the dollar. However, the dollar index has not strengthened significantly as a result, instead lingering near multi-month lows. OCBC's analysis indicates that the market is questioning the dollar's safe-haven status and advises investors to consider selling the dollar on rallies. This reflects that, against the backdrop of a fading "US exceptionalism" narrative, interest rate differentials alone are no longer sufficient to drive one-sided dollar strength.

**External Factors and Shifts in Market Sentiment**

The dollar's weakness is also influenced by the relative stability of other major currencies. For instance, the yuan exchange rate holding steady above the 7.18 level provides indirect support for non-US currencies such as the Australian dollar. OCBC believes that while the Reserve Bank of Australia's dovish stance limits some of the Aussie's gains, the broader trend of dollar weakness remains unchanged. The shift in market sentiment suggests that global investors are reassessing the value of dollar assets, with tariff uncertainty, fiscal concerns, and worries over potential Fed policy missteps collectively shaping the current pattern where the dollar finds it easier to fall than to rise.