The short-term price action is increasingly challenging the view for a stronger US dollar. The USD valuation looks stretched, but the broader drivers supporting the currency are still in place, in the opinion of economists at HSBC.

Are we past the peak?

“The November FOMC meeting will be crucial in assessing whether this USD shift is the start of a more structural trend or whether the price action is more symptomatic of a positioning squeeze, as we have witnessed in March, May and August 2022 already. 

“It is also worth bearing in mind the USD’s increasingly stretched valuations, based on a long-term real effective exchange rate (REER) measure. This could inhibit significant USD gains; however, until the broader drivers of the USD – global growth, risk appetite, and relative yields – show a bigger shift, it may be premature to call for a weaker USD.”