Synopsis: While the rising yields and potential for further Federal Reserve rate hikes drive expectations for a stronger US dollar, ING believes that in the short term, it might be too costly to sell off the currency.
1. Lingering Gap in Rate Expectations:
- ING's rates team has identified a potential target of 5.0% for 10-year treasuries.
- There exists a notable gap between the Federal Reserve's dot plot and the current rate expectations for 2023 and 2024.
- Given these circumstances, a spike in USD 2-year swap rates to levels surpassing 5.0% is a distinct possibility in the immediate future.
2. Dollar's Valuation:
- Despite being on the higher side in terms of valuation, the dollar is seen as expensive to sell in the current market scenario.
3. The Influence of the Bond Market:
- Instabilities in the bond market can potentially bolster the dollar, making it a stronghold for the time being.
- ING suggests that the DXY (Dollar Index) has the potential to climb back above the 107.00 mark either today or early next week.
Closing Remarks: Given the short-term dynamics, ING advises caution for investors considering offloading the US dollar. The present market conditions, coupled with future rate expectations, indicate a sustained strength in the currency.