Key points:
The dollar index, which measures the greenback against six major currencies, has hovered around 104.38, with an overnight peak of 104.57, as of early Thursday trading.
The strong performance has been fuelled by hawkish statements from Federal Reserve officials, moderating expectations for swift monetary easing.
CME Group’s FedWatch Tool has recorded a dip in the likelihood of a 50-basis-point rate cut during the final two meetings of 2024, with the probability slipping to 65% from 85% just a week prior.
This shift reflects concerns that the Fed may prioritise economic stability over aggressive rate cuts.
Picture: USDX is approaching resistance at 104.230 with momentum weakening based on the MACD on the VT Markets app.
Federal Reserve officials, including Kansas City Fed President Jeffrey Schmid and Philadelphia Fed President Patrick Harker, have suggested a more restrained approach, advocating for gradual reductions.
U.S. 10-year Treasury yields have mirrored this caution, rising to a three-month high of 4.26%.
Higher yields have historically drawn investors toward the U.S. dollar, weakening other currencies such as the yen, which fell to 153.19 per dollar on Wednesday before recovering slightly to 152.62.
See also: Fed Outlook Lifts Dollar; Yen Falls
The U.S. dollar’s upward momentum is not solely rooted in Fed policy. Political betting markets have reflected increased odds of a Trump victory in the upcoming election, as traders weigh the impact of inflationary policies like tariffs under a potential second term.
Polymarket, a cryptocurrency prediction exchange, has recorded a noticeable uptick in bets favouring Trump.
With key economic data supporting a strong dollar and U.S. bond yields rising, traders seem to be preparing for possible inflationary shocks in 2024.
As the dollar strengthens, we could see further pressure on global equities and commodities, which tend to underperform in a strong dollar environment.
While it’s unlikely the Fed will abandon its cautious stance, the market seems increasingly nervous about how prolonged U.S. strength might exacerbate inflation risks or lead to tighter financial conditions globally.
Looking ahead, geopolitical risks, especially in Japan’s political scene, and Trump’s growing influence on the market narrative are likely to contribute to further dollar gains.
Traders may continue to hedge against political uncertainties and divergent central bank policies by favouring the U.S. dollar in the near term.
However, risks remain if global central banks, particularly the ECB or BoJ, pivot unexpectedly in their policies.
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