Dollar: Supported by Carry Trades but Range-Bound in Near Term — OCBC

The dollar has recently exhibited clear range-bound trading characteristics, and despite multiple intertwined factors, carry demand from yield advantages continues to provide a buffer for the exchange rate. OCBC FX strategists Sim Moh Siong and Christopher Wong noted that weak U.S. economic data has significantly dampened market expectations for a Fed rate hike in September, and this pullback in policy expectations, combined with the dollar's own carry appeal, makes it difficult for the dollar to see a one-sided deep decline.

**Carry Advantage and Policy Expectations Form a Tug-of-War**

In the current market environment with a relatively positive risk backdrop, carry trade strategies in the high-yield dollar continue to gain support. Analysts argue that as long as the dollar maintains overall range-bound movement and market risk sentiment does not deteriorate sharply, carry demand can provide downside protection for the dollar. Meanwhile, rising expectations that the Fed will hold steady have removed some upside surprises from the policy side, limiting any breakout rally in the near term while also capping the scope for a sharp decline.

**External Variables and Market Sentiment in Play**

However, the dollar is not without headwinds. Market commentary noted that any signs of easing geopolitical tensions could prompt a partial pullback in the dollar. Additionally, comparisons of global economic data and potential intervention risks facing currencies such as the yen are also variables influencing capital flows. Hui Hui Min, China equity strategist at Bank of Singapore, also pointed out that while markets are unsettled by the shift in the Fed's stance, a moderate adjustment in interest rates is insufficient to interrupt the broader trend, and the medium-to-long-term direction of a weaker dollar has yet to be confirmed.

**Near-Term Pattern Hard to Break**

Overall, amid the three-way tug-of-war—weak data lowering the odds of a rate hike, carry returns providing underlying support, and potential external easing exerting upside pressure—the dollar lacks a catalyst to establish a clear direction in the near term. Investors are adapting to this range-bound pattern by repricing the future policy path. Market signals suggest that this shift in pricing logic means the dollar's consolidation phase remains the dominant theme for now.