MUFG Research sees a scope for the Fed to delays its next hike.

"Recent developments in financial markets could affect the performance of the USD by changing the outlook for Fed policy. The Fed decided to leave rates on hold last month after hiking for the first time in September in response to the energy price shock. The updated communication was surprisingly cautious about the need for further rate hikes, particularly given the recent strength of US growth and inflation. Fed Chair Kevin Warsh emphasised that higher rates are beginning to have a greater impact on the AI sector, making it more challenging for highly leveraged companies to secure financing. AI-related investments have sold off further since then, contributing to a tightening of US financial conditions," MUFG notes.

"Alongside the recent sharp drop in energy prices, this has encouraged the US rates market to pare back expectations for a December rate hike. A second hike in December is still judged to be more likely than not, but if financial conditions tighten further, expectations for another hike could be scaled back further. The Fed could then decide to delay its next hike, putting downward pressure on US yields and the USD heading into year-end," MUFG adds.