Brown Brothers Harriman (BBH) strategist Elias Haddad said on Wednesday that the US dollar has clawed back part of its recent losses as market concerns over Federal Reserve credibility begin to fade, but he cautioned that the relief rally is likely to remain shallow, with limited room for a sustained rebound.
In a note to clients, Haddad pointed to the dollar index’s partial recovery from its recent lows, attributing the bounce to a stabilization in rate expectations. However, he argued that the fundamental drivers that weighed on the greenback earlier this summer — including doubts about the Fed’s policy path and mixed US economic data — have not fully dissipated.
Also read: British Pound Under Pressure: Rabobank Warns of Lingering Fiscal Concerns
Fed credibility concerns ease, but not gone
The dollar’s recent weakness was largely driven by speculation that the Federal Reserve might be forced to pivot toward rate cuts sooner than previously signaled, especially after a string of softer inflation prints. That narrative pressured the currency through July. Now, with several Fed officials pushing back against imminent easing, some of those worries have eased, providing a modest floor under the dollar.
Still, Haddad emphasized that the market’s perception of Fed credibility remains fragile. “The relief rally looks shallow because the underlying questions about the Fed’s reaction function haven’t been fully answered,” he wrote. “Until we get clearer guidance on the timing and pace of any policy adjustment, the dollar’s upside is likely to be capped.”
Also read: Yen Surges on Suspected Intervention as USD/JPY Crashes Below 161.00
What to watch for the dollar’s next move
Investors are now looking ahead to key US economic releases, including the next non-farm payrolls report and consumer price index data, which could provide more clarity on the Fed’s path. A stronger-than-expected jobs report would likely reinforce the case for higher-for-longer rates, giving the dollar more durable support. Conversely, another soft inflation print could reignite dovish bets and renew downside pressure.
Haddad also noted that the dollar’s performance against major peers like the euro and yen will depend on relative central bank policy expectations. The European Central Bank and the Bank of Japan are facing their own policy dilemmas, which could create cross-currents in the forex market.
For now, the market is pricing a cautious Fed, and the dollar’s relief rally appears to be more of a technical correction than a trend reversal. Traders are advised to watch for any shifts in Fed rhetoric or economic data that could alter the current equilibrium.
Disclaimer: This article is for informational purposes only and does not constitute financial advice. Currency markets are volatile and unpredictable. Always conduct your own research or consult a qualified financial advisor before making investment decisions.
