FX Daily: Dollar struggling to shake off debasement trade

Daily Currencies Ratings – 01/09/2026

USD: Warsh support already vanishing

The dollar has surrendered roughly half of the gains sparked by Federal Reserve Chair Kevin Warsh's hawkish speech on Friday. Importantly, this retreat does not reflect any fading conviction on Fed tightening. The 2-year SOFR rate has held above 4.20%, more than 10bp higher than before the speech, and markets are pricing in 16bp of hikes for September and 37bp by year-end.

Despite support from the front end, every G10 currency gained against the dollar on Monday. The rise in US back-end yields appears to be the main culprit, even though that move was driven by higher oil prices as the US and Iran exchanged strikes.

That dynamic is somewhat concerning for dollar bulls. It suggests markets still view higher long-end yields through the lens of potential Treasury interventionism, feeding the debasement trade — a trade that a hawkish repricing of Fed expectations has still not been able to fully unwind. The debasement trade reflects investor concern that policy or fiscal actions could erode the currency's value over time, and higher yields driven by such fears tend to weaken rather than strengthen the dollar, in contrast to the typical response when yields rise on tightening expectations. It also points to the lasting FX impact of Treasury Secretary Scott Bessent's buyback move.

Still, ING would be very cautious about chasing a dollar correction further this week. In the bank's view, markets would need a string of materially disappointing data releases over the coming days to meaningfully reassess September FOMC expectations after Warsh's hawkish message last week, which is not considered likely.

The baseline forecast is for ISM manufacturing to remain above 55.0 today (JOLTS is the other main release this afternoon), ADP payrolls to print at 40k tomorrow, ISM services to stabilise on Thursday, and, most importantly, payrolls to come in at a robust 65k on Friday.

For now, ING is not prepared to argue that the relationship between the dollar and the front end has been structurally impaired. As conviction around a 16 September hike is cemented, the dollar should find decent support at the start of the month. September is also a seasonally strong month for the DXY, and barring a fresh surprise announcement on Treasury market intervention, the index can reclaim the 100.0 level.

Francesco Pesole

EUR: Downside risks prevail

German inflation edged higher to 2.9% in August, slightly below the 3.0% consensus. Today's eurozone-wide figures are expected to rise to 3.3% in the headline print, but the core rate is still seen unchanged at 2.5%.

Despite little evidence of ongoing second-round effects, the European Central Bank is almost guaranteed to hike rates again next week. In ING's interpretation, this still falls into the "insurance" hike classification, but further tightening from there — which is widely priced in by markets — would instead imply that the ECB sees restrictive policy as necessary, a much bolder move unless data shows a core inflation uptrend.

The market's high conviction about a September ECB hike means EUR/USD is now even more of a dollar story — with both the Fed and the ECB expected to tighten, the pair's direction hinges less on relative policy expectations and more on which central bank narrative dominates market attention. ING is not optimistic that 1.1600 can hold much longer as markets grow in confidence of a Fed hike already in September, and instead sees risks skewed to a retest of 1.150 in the first half of September.

The ongoing re-escalation in the Middle East and Russia-related headlines are not helping the bullish euro case at the moment. European natural gas prices are at their March peaks, keeping the euro's terms of trade under pressure — as a net energy importer, the euro area pays more for imports when gas prices rise, which historically weighs on the currency — and the positive impact on the euro of recent upward surprises in eurozone growth may rapidly run out of steam against such a commodity backdrop.

Francesco Pesole

NZD: Dovish surprise risk as RBNZ hikes

ING expects the Reserve Bank of New Zealand to hike rates by 25bp to 2.75% tomorrow morning (announcement at 0300 BST). Consensus is unanimous and markets are fully pricing in the move, so the impact on the New Zealand dollar will depend heavily on whether the statement still includes firmly hawkish guidance and on updated rate and economic projections.

As discussed in ING's preview, downside risks for the NZD exist. Market pricing (95bp by June 2027) looks far too hawkish. To validate such expectations, the Reserve Bank would need to revise rate projections materially higher, as they currently embed only another 25bp hike over the next three quarters. ING does not expect that to happen, instead forecasting CPI projections to be revised lower on the back of softer oil prices.

ING sees NZD/USD trading back below 0.590 in the near term as the RBNZ may fail to meet hawkish expectations while the USD finds some support.

Francesco Pesole

CEE: Inflation signals and hawkish repricing in focus

Polish inflation surprised to the upside in August, rising from 3.0% to 3.4%, mainly due to higher fuel prices, as the statistics office likely did not account for the government's VAT reduction in the latter part of the month. By contrast, food prices fell further, offering a dovish signal for inflation elsewhere in the region.

CEE PMIs are due today. On Thursday, the Czech Republic will release second-quarter wage data, where ING expects growth to slow from the unexpectedly strong 8.1% recorded in the first quarter. Turkey's August inflation is also due; ING forecasts only a modest decline from 1.8% to 1.6% month on month. On Friday, Czech inflation should rise from 1.7% to 1.9%, in line with the central bank's forecast, while the Czech Republic and Hungary will publish retail sales data.

Regional markets are firmly back in hawkish mode following the Fed chair's comments and the renewed escalation in the US-Iran conflict. With UK markets closed yesterday and CEE trading subdued, some catch-up is likely today. The Czech market is still pricing in almost four rate hikes and the Polish market nearly three, which should limit further weakening and could support gains today given further widening of rate differentials versus the euro.

Frantisek Taborsky

Source: ING