OCBC strategists Sim Moh Siong and Christopher Wong highlight that the US Dollar (USD) has started Q4 2026 on a firm footing, supported by resilient United States (US) growth and hawkish Federal Reserve (Fed) risks. However, they expect only a moderate USD rally into year-end as markets scale back near-term Fed hike expectations and as bond-market volatility increasingly drives FX dynamics.

Bond volatility spills into currencies

“The USD has started 4Q26 on a firm footing, consistent with our view of a stronger USD into year-end. Until recently, FX volatility had remained subdued. Despite hawkish Fed risks and the energy shock, USD gains have been measured rather than disorderly.”

“In short, while the USD continues to benefit from relatively resilient US growth and hawkish Fed risks, the bigger story is the transmission of bond market volatility into FX markets. If rate volatility remains elevated, pressure on carry trades, cyclical currencies and EUR is likely to persist, while traditional havens such as CHF and USD should remain supported.”

“Our base case remains for a moderate rather than aggressive USD rally into year-end. Markets have sharply reduced expectations of an October Fed rate hike after several Fed officials signalled no urgency to tighten policy further and indicated a preference to assess additional incoming data before making their next move. Yet markets are still pricing roughly three rate hikes over the coming 12 months.”

“If upcoming inflation data continue to show that underlying price pressures are contained, markets may gradually scale back Fed tightening expectations, limiting further USD upside.”