ING: Don't Call it a Dollar Comeback - FJElite

The Fed decision remains a close call, but the base case now favours a rate hike later this month. A bearish flattening of the US yield curve would typically support the dollar, especially against lower-yielding currencies, leading to a revised year-end EUR/USD forecast of around 1.16 from 1.18 previously. Even so, this is not viewed as the start of a major tightening cycle, and the expected cyclical dollar decline is delayed rather than cancelled.

That weaker-dollar move is now pushed back to next spring, when inflation is expected to be closer to 2% and markets may begin pricing policy normalisation toward 3.25%. USD/JPY is still seen more likely in a 155-160 range than below 150, despite faster BoJ tightening expectations. Elsewhere, higher rates should support the Australian dollar and Norwegian krone, while the Swiss franc may stay under pressure. High-yielding EM currencies are also expected to remain favoured in a relatively low-volatility environment.