Why does the dollar still face downside risks despite expectations that the Fed will remain on hold with hawkish stances?
2026-07-29 20:02:49
With the Federal Open Market Committee (FOMC) of the Federal Reserve about to announce its interest rate decision, the US dollar is at a critical juncture. Over the past month, international oil prices have fluctuated wildly, and US economic indicators have been mixed, leading to significant market volatility. Against this backdrop, many investors bullish on the dollar have aggressively established long positions, betting that Fed Chairman Kevin Warsh will release hawkish policy signals. However, recent weak US macroeconomic data—cooling consumer confidence and weaker-than-expected job growth—has sparked heated debate among institutional strategists: can the current dollar premium continue? Will the excessively concentrated long dollar positions face pressure due to the market's repricing of the Fed's dovish policy stance? 
Comparison of Institutional Views: Mitsubishi UFJ Bank vs. DBS Bank To clarify the market assessments of mainstream institutions ahead of the Fed's decision, this article summarizes the core differences in the views of two leading banks as follows: I. Policy Expectations Mitsubishi UFJ Bank: The Fed will maintain a hawkish stance, keeping the benchmark interest rate unchanged, while emphasizing high inflation risks in its official statements. DBS Bank: Market bulls have heavily positioned themselves, with their core bet on an unexpected Fed rate hike. If the Fed merely maintains a stable stance without releasing strong tightening signals, the dollar will face asymmetrical downward pressure. II. Economic Fundamentals Assessment Mitsubishi UFJ Bank: The bank acknowledges the weakening US economic data, with the US consumer confidence index falling to 90.8 in July and ADP employment growth of only 15,000, indicating a significant cooling in the job market. However, the institution believes that high inflation risks remain, and the Fed will continue to maintain a tight monetary policy stance. DBS Bank: Slowing US economic growth and falling US Treasury yields indicate that the market has over-priced in the Fed's hawkish expectations. Previous optimism relied excessively on volatile energy price movements rather than real economic fundamentals. III. Market Positions and Exchange Rate Impact Mitsubishi UFJ Bank: The Fed's policy stance of "maintaining high interest rates for longer" will continue to support US Treasury yields and the dollar's performance, thus exerting general downward pressure on major Asian currencies such as the Singapore dollar, South Korean won, and Malaysian ringgit. DBS Bank: If the Fed does not clearly signal a tightening of interest rates in September, the current overcrowded dollar long positions may be liquidated, triggering a dollar pullback. High inflation risks support the resilience of US Treasury yields and the dollar. Mitsubishi UFJ Bank analyst Lloyd Chan believes that the Fed's decision is likely to implement a hawkish policy to maintain stability, helping the dollar stabilize at recent highs. Despite recent weak market data—with the yields on 2-year and 10-year US Treasury bonds falling slightly by 4 basis points and market pricing in July indicating only a 34% probability of a 25 basis point rate hike by the Federal Reserve—the overall risk landscape remains biased towards a stronger dollar. Chen Luoyi stated that as long as Fed Chairman Warsh reiterates that inflation risks remain high, US Treasury yields will continue to be supported, and the dollar will remain strong, putting overall pressure on Asian foreign exchange markets. "Our core prediction is that the Fed will maintain a hawkish stance: keeping interest rates unchanged while emphasizing high inflation risks. This pattern will support the performance of US Treasury yields and the dollar, thus exerting general downward pressure on foreign exchange markets in Asian countries." Overcrowded long positions and the lack of hawkish surprises could trigger a wave of dollar liquidation. DBS Bank analyst Philip Wee is cautious about the future trend of the dollar, warning that speculative funds holding large long positions in the dollar face significant downside risks. In July, Brent crude oil prices surged from $70 to $100. Driven by the soaring energy prices, the market widely bet on an unexpected interest rate hike by Federal Reserve Chairman Warsh, leading investors to flock to long positions in the US dollar. However, as oil prices retreated from their highs and US economic growth momentum continued to cool, if the Fed's decision this time is merely neutral and does not release a strong hawkish signal, the previously aggressive long positions in the US dollar will be forced to be liquidated, putting downward pressure on the dollar exchange rate. "Market skepticism suggests that long positions in the US dollar have over-priced in the Fed's hawkish expectations, with trading logic overly tied to volatile energy prices rather than genuine economic fundamentals. Therefore, if this FOMC meeting neither raises interest rates nor releases a clear signal of tightening policy in September, speculative funds may significantly reduce their long positions in the US dollar." A comprehensive institutional assessment concludes: Market expectations are highly tense, and the dollar's performance is increasingly divergent. Based on the combined views of two major institutions, the market's pre-Fed decision environment is highly tense, and market expectations have already solidified. Mitsubishi UFJ Bank maintains its assessment of the dollar's resilience, believing that hawkish policy support coupled with continued inflation warnings will stabilize US Treasury yields and maintain the dollar's strong downward pressure on non-US currencies. DBS Bank, however, emphasizes the risks: current hawkish market expectations are primarily driven by energy prices and are disconnected from weakening economic fundamentals. If the Federal Reserve fails to clearly signal a short-term policy tightening, overcrowded dollar long positions will face concentrated unwinding, triggering a rapid dollar correction.
Comparison of Institutional Views: Mitsubishi UFJ Bank vs. DBS Bank To clarify the market assessments of mainstream institutions ahead of the Fed's decision, this article summarizes the core differences in the views of two leading banks as follows: I. Policy Expectations Mitsubishi UFJ Bank: The Fed will maintain a hawkish stance, keeping the benchmark interest rate unchanged, while emphasizing high inflation risks in its official statements. DBS Bank: Market bulls have heavily positioned themselves, with their core bet on an unexpected Fed rate hike. If the Fed merely maintains a stable stance without releasing strong tightening signals, the dollar will face asymmetrical downward pressure. II. Economic Fundamentals Assessment Mitsubishi UFJ Bank: The bank acknowledges the weakening US economic data, with the US consumer confidence index falling to 90.8 in July and ADP employment growth of only 15,000, indicating a significant cooling in the job market. However, the institution believes that high inflation risks remain, and the Fed will continue to maintain a tight monetary policy stance. DBS Bank: Slowing US economic growth and falling US Treasury yields indicate that the market has over-priced in the Fed's hawkish expectations. Previous optimism relied excessively on volatile energy price movements rather than real economic fundamentals. III. Market Positions and Exchange Rate Impact Mitsubishi UFJ Bank: The Fed's policy stance of "maintaining high interest rates for longer" will continue to support US Treasury yields and the dollar's performance, thus exerting general downward pressure on major Asian currencies such as the Singapore dollar, South Korean won, and Malaysian ringgit. DBS Bank: If the Fed does not clearly signal a tightening of interest rates in September, the current overcrowded dollar long positions may be liquidated, triggering a dollar pullback. High inflation risks support the resilience of US Treasury yields and the dollar. Mitsubishi UFJ Bank analyst Lloyd Chan believes that the Fed's decision is likely to implement a hawkish policy to maintain stability, helping the dollar stabilize at recent highs. Despite recent weak market data—with the yields on 2-year and 10-year US Treasury bonds falling slightly by 4 basis points and market pricing in July indicating only a 34% probability of a 25 basis point rate hike by the Federal Reserve—the overall risk landscape remains biased towards a stronger dollar. Chen Luoyi stated that as long as Fed Chairman Warsh reiterates that inflation risks remain high, US Treasury yields will continue to be supported, and the dollar will remain strong, putting overall pressure on Asian foreign exchange markets. "Our core prediction is that the Fed will maintain a hawkish stance: keeping interest rates unchanged while emphasizing high inflation risks. This pattern will support the performance of US Treasury yields and the dollar, thus exerting general downward pressure on foreign exchange markets in Asian countries." Overcrowded long positions and the lack of hawkish surprises could trigger a wave of dollar liquidation. DBS Bank analyst Philip Wee is cautious about the future trend of the dollar, warning that speculative funds holding large long positions in the dollar face significant downside risks. In July, Brent crude oil prices surged from $70 to $100. Driven by the soaring energy prices, the market widely bet on an unexpected interest rate hike by Federal Reserve Chairman Warsh, leading investors to flock to long positions in the US dollar. However, as oil prices retreated from their highs and US economic growth momentum continued to cool, if the Fed's decision this time is merely neutral and does not release a strong hawkish signal, the previously aggressive long positions in the US dollar will be forced to be liquidated, putting downward pressure on the dollar exchange rate. "Market skepticism suggests that long positions in the US dollar have over-priced in the Fed's hawkish expectations, with trading logic overly tied to volatile energy prices rather than genuine economic fundamentals. Therefore, if this FOMC meeting neither raises interest rates nor releases a clear signal of tightening policy in September, speculative funds may significantly reduce their long positions in the US dollar." A comprehensive institutional assessment concludes: Market expectations are highly tense, and the dollar's performance is increasingly divergent. Based on the combined views of two major institutions, the market's pre-Fed decision environment is highly tense, and market expectations have already solidified. Mitsubishi UFJ Bank maintains its assessment of the dollar's resilience, believing that hawkish policy support coupled with continued inflation warnings will stabilize US Treasury yields and maintain the dollar's strong downward pressure on non-US currencies. DBS Bank, however, emphasizes the risks: current hawkish market expectations are primarily driven by energy prices and are disconnected from weakening economic fundamentals. If the Federal Reserve fails to clearly signal a short-term policy tightening, overcrowded dollar long positions will face concentrated unwinding, triggering a rapid dollar correction.
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