Key points:
The US dollar index (Symbol: USDX) is trading in a bullish momentum after two consecutive days of gains lifted its valuation.
Broadly, the US dollar was off to a strong start this week as markets ramped up momentum across the board in anticipation of the upcoming personal consumption expenditures index (PCE), which will be announced on Friday.
With this said, the PCE data for May will show whether price pressures eased from the 2.8% recorded in April. If so, this will increase the probability of interest rate cuts this year.
Related article: Interest rate tug-of-war for central banks
In that context, the US dollar has been in an uptrend this year, despite projections of rate cuts circulating since the final quarter of 2023. From January through now, the US dollar is up around 5% against a basket of six currencies.
The image above shows the strength in the US dollar index, as observed on the VT Markets app.
Among various currencies, the dominance is most pronounced against the Japanese yen. The USDJPY pair has advanced 13% and has caused all sorts of headaches for the Bank of Japan.
Picture: JPY losing strength against USD, as observed on the VT Markets app.
The strength of the US dollar makes it more expensive for emerging market countries to service their dollar-denominated debt, potentially leading to financial instability in those regions.
Further, any commodities priced in the US dollars, such as oil and gold, may see price adjustments as a stronger dollar makes these commodities more expensive for holders of other currencies.
As the markets await the PCE data, it is crucial to monitor how the USDX behaves and the potential signals from the Federal Reserve regarding future rate cuts. The interplay between inflation data and Fed policy will be a key driver of market volatility and trading opportunities in the coming weeks.
