Washington – The dollar's rise is accelerating as stubborn inflation raises doubts about how aggressively the Federal Reserve will cut interest rates this year relative to other central banks.
The dollar index, which measures the U.S. currency against a basket of six major currencies, has risen 4.6 percent this year and is near its highest level since last November. The index rose 1.7 percent last week, its biggest weekly gain since September 2022.
The dollar advanced as market participants became increasingly convinced that the U.S. Federal Reserve should leave interest rates at current levels for a longer period of time to avoid the possibility of a return to inflation.
Stronger-than-expected inflation data last week reinforced this view, and last Friday, investors favored a rate cut of only 50 basis points in 2024, compared with the 150 basis points initially priced in. year.
In contrast, investors believe some global central banks, including the European Central Bank, the Bank of Canada and the Riksbank, will be given more freedom to ease monetary policy.
The percentage increase in the U.S. currency index since the start of 2024 is near its highest level since last November.
That's a reversal from a few months ago when many thought the central bank would be the first to cut interest rates.
“We have a clear path for the Fed to be the first actor,” said Eric Levy, chief investment officer at Billard Wealth & Investment Management. “The data we've got really undermines that.”
“I can see clear reasons why the dollar could rise further,” he told Reuters.
Yield differentials between the United States and other economies have widened in recent weeks, contributing to the U.S. currency's rise as higher yields improve the attractiveness of dollar-denominated assets.
Spreads over two-year U.S. bonds due 2022 hit their widest level late last Friday, LSEG data showed, a day after the European Central Bank indicated it may cut interest rates next June.
Bullish investors increased their bets on the US currency, while others hesitated. Data from the Commodity Futures Trading Commission showed net bets on the dollar hit $17.74 billion last week, the highest level since August 2022.
Central bank policy has varied in recent months, reflecting the various struggles economies face to control inflation.
The Swiss central bank last March cut interest rates by 25 basis points, its first cut in nine years.
The Riksbank has indicated it may cut interest rates next May if inflation continues to fall, while the Bank of Canada recently signaled it was ready to ease monetary policy.
On the other hand, central banks in Australia, Britain and Norway are reluctant to ease monetary policy.
Meanwhile, the Japanese yen fell to a 34-year low against the dollar, although the country recently ended eight years of negative interest rates. The Bank of Japan ruled out using interest rate hikes to support the currency.
Eric Mireles, managing director and co-head of Citizens Global Markets, believes the dollar could continue to rise on the back of a more hawkish Fed vis-a-vis the European Central Bank.
Indicators show the euro has lost 3.6 percent against the US currency since the start of the year.
“There's room for the dollar to rise,” Mirles said. “We have a strong economy now, and overall, the trajectory of incomes is increasing.” While Europe is struggling in terms of growth.
A rising dollar could complicate inflationary wars in other economies.
A strong dollar can also act as a headwind for US multinationals, as it makes it more expensive to convert their foreign profits into dollars and makes exporters' products less competitive abroad.
There may be other factors pushing the dollar higher, as the U.S. currency is a popular destination for investors during times of geopolitical uncertainty, which has intensified in recent days on fears of an expansionary focus in the central region. East.
Brian Leibovitz, chief global FX trader at Northern Trust, believes the dollar could get a boost from the central bank to allow assets to move off its balance sheet through so-called “quantitative tightening.”
The Federal Reserve currently allows up to $60 billion a month in Treasury securities and up to $35 billion a month in mortgage bonds to mature and not be redeemed.
While Northern Trust expects the dollar to rise as much as 5 percent ahead of the U.S. presidential election, “market activity from the dollar's early rise this week suggests the move could happen sooner than expected,” Leibovich said.
Others are less convinced that the US currency is more likely to appreciate. Scotiabank analyst Sean Osborne wrote that recent dollar strength has led investors to consider a significant amount of bullish news.
Interest rates and price differentials are in favor of the dollar, he said, meaning that “the current trend indicates that the US currency will be better supported.”
