We have revised our FX forecasts.

We do not see last week’s Fed rate hike triggering a structural breakout from the DXY Index’s post-Liberation Day trading range, which has been in place since mid-2025. Nor do we see the major central banks moving sufficiently apart to generate a sustained divergence in monetary policy.



Market pricing reinforces this view. Further Fed hikes over the next 6-9 months are expected to be accompanied by tightening from the European Central Bank and the Bank of England. Rather than establishing a clean directional trend, major currencies are likely to remain choppy and range-bound, with tactical opportunities emerging as markets repeatedly reprice the timing and extent of central bank announcements.



The unresolved standoff between US Treasury Secretary Scott Bessent and bond vigilantes is another reason to be cautious about extrapolating Fed hikes into sustained USD strength. Bessent’s expanded Treasury buybacks may provide periods of relief, but they do not resolve the forces pushing long-term bond yields higher. Investors are still seeking compensation for higher inflation and an elevated fiscal deficit. 

The November 3 US midterm elections should have an important influence on the DXY Index, keeping it in the lower half of its 96-102 range. The polls show Democrats with a sizeable lead and a significant swing away from Republicans since 2024. A change in congressional control could challenge the US exceptionalism narrative that helped stabilize the USD following its post-Liberation Day sell-off. US President Donald Trump’s decision to revoke the press credentials of three media networks was likely intended to contain public scrutiny of the unpopular Iran conflict and associated energy-led rise in the cost of living.

There is, however, a counterargument against extrapolating election uncertainty into a one-sided USD decline. Greater political gridlock could constrain the Trump administration’s ability to push additional fiscal expansion and ease pressure on long-dated Treasury yields, while raising doubts about extending the conflict in Iran. Hence, the midterms could alter the balance of risks without necessarily breaking the broader range.

Asian currency highlights

We have lowered our 2026 floor for USD/CNY to 6.60 from 6.70 while retaining scope for further declines. The CNY remains Asia’s strongest currency this year, appreciating 4.3% YTD to a four-year high against the USD as of September 18. It currently has an appreciation bias into the September 24 Trump-Xi Summit in Washington and the October 8-9 EU-China meeting in Beijing.

However, the CNY’s monthly gains have slowed to 0.34% in September from 0.48% in August and 0.53% in July vs. two straight months of near-1% gains into the earlier Xi-Trump summit in May. Washington and Brussels are independently converging on China’s large external surplus, excess industrial capacity, and restricted market access. This leaves China facing a delicate balancing act. China will find it more difficult to rely on a weaker exchange rate as an escape valve for its domestic weakness. Making concessions to the US without addressing Europe’s complaints could lead Brussels to adopt tougher trade defences. Given that the Fed and the ECB have prioritised monetary tightening to return energy-led inflation to target, China has more incentive to keep the CNY relatively stable or allow measured appreciation.



The KRW is likely to consolidate after moving rapidly from excessive pessimism in 1H26 to a sharp flow-driven recovery in 3026. The TWD’s experience in 2Q25 offers a useful parallel, i.e., the risk that corporates will convert or hedge accumulated USD holdings can fade quickly once expectations of one-sided appreciation subside.  The recent burst of USD repatriation associated with a major Korean semiconductor company’s overseas listing is also unlikely to recur on the same scale. Meanwhile, the Bank of Korea’s hawkish outlook is partly offset by the Fed’s rate hike and market expectations for further tightening amid renewed volatility in global oil prices. Regional developments should become important too. The KRW’s rebound coincided with steady CNY appreciation and US-Japan efforts to arrest excessive JPY weakness. The KRW’s next phase is more likely to be consolidation and digestion of those gains than a continued surge.

Quote of the Day
“A well-adjusted person is one who makes the same mistake twice without getting nervous.”
     Alexander Hamilton

Today in history
Britain abandoned the gold standard on September 21, 1931, devaluing the pound by roughly 20% to halt a massive drain on gold reserves during the Great Depression.