Dollar: Momentum Fades as Fiscal Risks Rise – DBS

The US dollar index has shown recent weakness, with DBS Group Research analyst Philip Wee noting that the dollar is losing momentum. Markets are reassessing multiple factors, including potential joint intervention by the US and Japan, adjustments to expectations for a Bank of Japan rate hike and Federal Reserve rate cuts, while rising US fiscal risks are emerging as a key new variable weighing on the dollar.

**Multiple Expectation Adjustments Pressure the Dollar**

Market expectations for major central bank policies are diverging, eroding the dollar's yield advantage. On one hand, DBS expects the Bank of Japan to hike rates by 25 basis points in June after holding in April, with domestic tightening pressures building, providing support for the yen. On the other hand, despite inflation pressures limiting the Fed's easing room, market expectations for future Fed rate cuts continue to heat up. This shifting policy outlook is driving capital flows toward non-US assets.

**US Fiscal Risk Becomes a New Concern**

The deterioration of US fiscal conditions is the underlying reason for dollar pressure. DBS notes that an unexpected sharp increase in the US defense budget will exacerbate federal fiscal fragility. Meanwhile, rising long-dated Treasury yields coupled with higher fiscal risk premiums reflect growing market concerns over US debt sustainability. This macro backdrop not only undermines the dollar's safe-haven appeal but also prompts DBS to recommend investors increase gold exposure to hedge against portfolio drawdown risks. According to reports, gold has performed strongly recently, breaking above the $3,400 per ounce level, as the dollar weakens and Fed rate cut expectations rise.

**Dollar Faces Long-Term Downside Risks**

Based on the above analysis, DBS believes that among major currency forecasts, the dollar may face long-term downside risks. Although other major economies, such as the eurozone and Japan, face their own structural challenges including energy dependence and weak growth—relative vulnerabilities that previously served as key supports for the dollar—current market focus has clearly shifted to US fiscal discipline and debt burden issues. The dollar-yen exchange rate previously depreciated to near 160, highlighting the short-lived effect of intervention measures. If US fiscal risks continue to fester, the dollar could enter a longer cycle of weakness.