- The index continues its strong recovery and is approaching 108.00.
- The speeches of the members of the Fed reinforced the recent increases of the dollar.
- Yields resume the upward trend throughout the curve and support the dollar.
The dollar, in terms of the Dollar Index (DXY), continues to rise and reaches multi-week highs around 107.70 by the end of the week.
Dollar index refocuses on 108.00
The index advances for the third consecutive session amid renewed and intense buying interest in the dollar. Notably, DXY posted gains in five of the last seven sessions through Friday.
The new improvement of the dollar comes from the continuation of the upward trend of US yields along the curve, where the curved zone and the long end are already sailing in monthly highs around 2.95% and 3.20%, respectively.
Meanwhile, the resumption of strong dollar demand appears to be underpinned by recent hawkish comments from Fed rate-setters: Mary Daly (hawk) tipped for a 50 or 75 basis point hike in the September meeting, James Bullard (hawk) defended a 75 basis point hike and said he expects rates to be in the 3.75%-4.00% region by the end of the year. Esther George (hawk) suggested economic growth will suffer, while Neel Kashkari (centrist) echoed that view, saying he is not sure the Fed can bring down inflation without triggering a recession.
No data is released on the US calendar on Friday, except for the speech by Thomas Barkin of the Richmond Fed (2024 voter, centrist).
What to watch out for around the dollar
The strong bounce in the dollar responds to some worsening of the conditions in the risk complex, which motivates the DXY to recover the upper part of 107.00, or the highs of several weeks.
Meanwhile, the dollar is set for additional volatility amid investors pricing in the Fed’s next move, ie a 50 or 75 basis point hike in September.
From a macroeconomic point of view, the dollar appears to be supported by the Fed’s divergence from most of its G10 peers (especially the ECB), combined with bouts of geopolitical turmoil and the occasional resurgence of risk aversion.
‘Hot’ topics for the asset: Hard/soft/soft landing for the US economy. Increased geopolitical effervescence against Russia and China. More aggressive Fed rate path this year and in 2023. Trade conflict between the US and China.
Relevant levels of the Dollar Index
Now the index is gaining 0.11% at 107.60 and a break of 107.72 (Monthly High 19 Aug) would expose 109.29 (2022 High 15 Jul) and then 109.77 (Monthly High Sep 2002).
Elsewhere, immediate support is found at 104.63 (Monthly Low Aug 10), followed by 104.07 (100-Day SMA) and finally 103.67 (Weekly Low Jun 27).
Source: Fx Street