FX markets are relatively quiet. US interest rate volatility embodied in the MOVE index has dropped back to the lows of the year. Certainly, the stability of the US Treasury market has been one of the big surprises of 2025. As we move nearer to year-end in FX, we see the commodity currencies doing pretty well – or more precisely, the commodity currencies backed by metals. That was one of our key calls for 2026, where we favoured Chile’s peso and the South African rand on the metals story. This theme should be a multi-quarter one.
For the big dollar, it remains slightly offered on the view that the Fed will cut rates next week and that the arrival of Kevin Hassett as Fed Chair will somehow make the Fed more dovish. Were Hassett confirmed, we would look at the dollar through the lens of US real interest rates – in other words, if the Fed took rates too low relative to inflation expectations. Looking at two-year US real interest rates derived from the two-year inflation swap, real rates actually rose 25bp between September and November, largely on a 50bp decline in inflation expectations. The scenario from a Hassett pick would surely be lower real rates as inflation expectations pick up. This should deliver a weaker dollar.
For the short term, however, there seems to be a consensus view that the dollar will weaken into year-end on seasonal flows. That is our view too, and why we have year-end targets at 1.18 and 152 for EUR/USD and USD/JPY, respectively. For today, the focus will be on the delayed core PCE inflation data and the latest consumer sentiment readings. Neither looks set to be a big market mover and more attention will be given to the 1800CET World Cup draw in Washington and whether President Trump is awarded FIFA’s newly minted Peace Prize.
The longer DXY can trade under 99.00, the more likely it is a drop to the 97.80/98.00 area.
Chris Turner
