Fed hikes may alter near-term dollar trajectory, but long-term outlook remains steady: Report
The Fed’s ability to maintain its credibility could also reduce the need to hedge large dollar-denominated assets, Axis Bank report said.
The Federal Open Market Committee (FOMC) raised interest rates, and while its language was seen as hawkish, market pricing suggests that significantly more tightening may be required, both at the shorter end of the yield curve and in terms of the longer-term neutral rate, according to a report by Axis Bank. The US Federal Reserve is no longer the least hawkish among major central banks, the report said.
In the longer term, elevated fiscal spending is likely to persist, potentially keeping the Fed’s policy rate too low if the projections in its dot plot are followed. Axis Bank therefore retains its view of a mildly weaker US dollar and higher term premia, with the 10-year US Treasury yield potentially moving above 5%.
However, a shift in expectations around near-term rate hikes, along with developments in French and German politics, could trigger periods of dollar strength over the next few months. The Fed’s ability to maintain its credibility could also reduce the need to hedge large dollar-denominated assets, the report said.
Another factor is China, where resistance to currency appreciation appears to be fading. Axis Bank said it may need to lower its midpoint forecast to 6.60 while maintaining its broader rupee outlook. The bank also allows for a near-term decline in the euro to 1.12 and sees the pound at around 1.32. It will continue to monitor the Bank of Japan for rhetorical signals.
“Although the Fed is no longer the least hawkish among major central banks, the degree of tightening required to move out of fiscal dominance territory remains uncomfortably high. As a result, this is likely to sustain pressure on term premium, with spillover effects on domestic interest rates,” said Tanay Dalal, senior vice president, Business & Economic Research, Axis Bank.
Meanwhile, strong export growth and a decline in gold imports helped contain India’s goods trade deficit in August, while robust tax collections and slower revenue expenditure kept state finances in check, according to an Axis Bank report.
India’s goods trade deficit stood at around $27 billion in August 2026, translating to an annualised deficit of $336 billion, or 8.6% of GDP, on a seasonally adjusted basis, the report said. The deficit was broadly unchanged from a year earlier, as a narrower gold deficit offset increases in oil and non-oil, non-gold deficits.