Yesterday’s semi-annual Senate testimony by Federal Reserve Chair Jerome Powell surprised on the hawkish side and triggered a large Dollar rally. Economists at ING expect the greenback to remain firm near term, but a broad-based decline should occur in the long run.

Markets may be underestimating the risk of a hard landing for the US economy

“Can the Fed continue to push the Dollar higher? The short answer is yes, essentially because even assuming markets won’t price in a higher peak rate than the current 5.75%, a 50 bps move in March isn’t fully priced in (40 bps embedded in the OIS curve) and there is ample room to scale back rate cut expectations for end 2023 and early 2024.”

“However, we keep warning against building bullish-Dollar views beyond the short-term: markets may be underestimating the risk of a hard landing for the US economy, and we remain of the view that a broad-based Dollar decline is only delayed.”