Ugo Lancioni, senior portfolio manager at Neuberger, shares his insights on the recent Fed meeting.
The recent weakening of the dollar should be read in a complex context, where short-term cyclical factors and medium-term structural drivers coexist. In the medium term, we remain bearish: the dollar remains overvalued on a long-term basis, and large US twin deficits require external financing which, over time, results in a weaker currency rather than higher rates. In the short term, visibility is limited and justifies neutrality: the strength of US macro data, inflationary pressures related to the energy shock and the investment cycle in AI continue to support the dollar.
This week’s FOMC, the first chaired by Warsh, surprised on the hawkish side. Rates remained unchanged, but individual Fed members’ projections of the future path of rates were revised more sharply upward than expected, with a majority pointing to higher rates for longer and half of members expecting at least one hike by the end of the year. Inflation forecasts for 2026 have been revised significantly upwards. Warsh removed the usual forward guidance on the direction of monetary policy and took an explicitly hawkish tone on inflation. The dollar appreciated by about 1%, with 2-year Treasuries up 13 basis points. The peak of hawkish rhetoric appears further away by the hour than markets had previously anticipated, and a downward move in the dollar may require waiting longer for weaker macroeconomic data to materialise.
The BOJ has meanwhile raised rates to 1%, the highest level since 1995, confirming the gradual normalisation with further hikes possible within the year. Despite this, the yen remains weak due to the still wide yield differentials with the US. The negative stance on the yen remains in the portfolio, with the gradual narrowing of the rate differential representing the main risk to monitor.
On the geopolitical front, the preliminary agreement to reopen the Strait of Hormuz reduced energy prices and improved sentiment, weakening the energy-inflation-rate channel that had supported the dollar. With the reduction of the geopolitical premium, monetary policy is set to reassert itself as the primary driver of FX, with this week’s Fed meeting being direct confirmation of this. However, hundreds of ships are still waiting for safe passage: new tensions could quickly bring upward pressure on oil and the dollar.
In terms of positioning, in addition to the yen, the Swiss franc is underweight as a funding currency. A slight negative view is held on the pound, due to political deterioration and a firm Bank of England, and on the euro, where a fragile economy and an ECB with limited room to manoeuvre erode currency support. On the positive side, the Australian dollar is the main long position, benefiting from the improvement in the external balance and one of the highest short-term yields in the G10. The New Zealand dollar is positive, supported by a markedly hawkish central bank. In an environment of resilient risk appetite, exposure is maintained to some emerging market currencies with high carry, where the yield differential offers an attractive cushion against the dollar.
The framework remains dual: bearish bias on the dollar in the medium term, flexibility and an opportunistic approach in the short, guided by events. However, the hawkish outcome of the FOMC shifts the balance of risks in the short term towards a stronger dollar, delaying the conditions needed for structural weakening.
