The USD continued its rally in September and the momentum as well as the support from superior growth and interest rate run-rates point to further USD upside. Rising risk aversion also supports the USD and is unlikely to reverse as abruptly as it did at the end of last year. However, the risk is that the financial tightening becomes disruptive and forces the Fed to make a dovish turn, writes Bernhard Eschweiler, economic adviser for QCAM Currency Asset Management, in commentary.
“So far, the financial tightening resulting from rising interest rates and risk aversion has not created financial stress, but the risk is increasing and may come to a point where this threatens the economy and the market starts to anticipate a dovish Fed pivot. Indeed, failure to quickly re-install leadership in the House of Representatives and pass the 2024 budget could create more disruptive financial tightening and raise questions about the sustainability of US government debt,” he wrote.