The US dollar is the global reserve currency, and serves as a benchmark for pricing a range of assets such as commodities. Based on a recent survey by the Bank for International Settlements, more than 40% of all currency trading involves the US dollar, thus the performance of the currency is watched closely around the world.
The US dollar is currently slightly lower against all major currencies except the Japanese yen. Yesterday, the buck moved up sharply for the second session in a row. Beyond the move higher, note that trading volumes in US dollar index futures accelerated compared to the previous session and relative to 30-day averages. This is a sign that traders bought the dollar with conviction. Today's US dollar index trading range is 94.30 - 96.60.
Following a significant move higher in the last two sessions, the buck is currently taking a breather. As risk sentiment continues to deteriorate, the dollar appears to have found buyers seeking safety. Yesterday, US equity markets resumed weakening, with the S&P 500 ending the day down by more than 1%. Growth-oriented indices, such as the NASDAQ Composite, fared even worse as the US growth outlook darkens. In currency markets, the euro was particularly weak against safe haven peers such as the yen and the Swiss franc. All else held equal, the dollar tends to strengthen in relative terms when 'risk on' currencies sell off.
Turning to the latest news, yesterday's Federal Reserve speakers suggested that the pace of future rates hikes may need to be re-assessed. Federal Reserve Vice Chairman Quarles called for a more gradual pace of rate hikes, suggesting that the Fed should deliver about one hike per quarter. "Absolutely, my path for policy is more gradual" than most other policymakers, he said. St. Louis President James Bullard also noted that continued rate hikes may result in a recession. Specifically, he suggested that the Fed may have to change course if tax cut-fueled growth begins fading in the near future. Following the significant equity market sell-off this month and thanks to recent weakness in economic data (e.g. September retail sales), the Federal Reserve is less likely to continue signaling tighter monetary policy.
While the dollar has benefited from the relative outperformance of the US economy over the past few quarters, the buck is likely to continue strengthening as US growth begins slowing in rate-of-change terms. As a safe haven currency, the dollar tends to the strengthen the most in response to slowing growth. Our outlook on the dollar remains bullish.
|October 15||NY Empire State Manufacturing Index OCT||21.10||19|
|October 15||Retail Sales YoY SEP||4.7%||6.5%|
|October 15||Business Inventories MoM AUG||0.5%||0.7%|
|October 15||Monthly Budget Statement SEP||$119B||$-214B|
|October 16||Industrial Production YoY SEP||5.1%||4.9%|
|October 16||JOLTs Job Openings AUG||7.136M||7.077M|
|October 16||NAHB Housing Market Index OCT||68||67|
|October 17||Building Permits SEP||1.241M||1.249M|
|October 17||Housing Starts SEP||1.201M||1.268M|
|October 17||Fed Brainard Speech|
|October 17||FOMC Minutes|
|October 18||Initial Jobless Claims 13/OCT||210K||215K|
|October 18||Philadelphia Fed Manufacturing Index OCT||22.2||22.9|
|October 18||Fed Bullard Speech|
|October 18||Fed Quarles Speech|
|October 19||Fed Kaplan Speech|
|October 19||Existing Home Sales SEP||5.34M|
|October 19||Fed Bostic Speech|
In our previous commentary on the US dollar, we wrote that the buck was set to rise further thanks to our forecast for slowing US growth and inflation. Given the US dollar’s safe haven qualities, the currency performs the best when economic conditions deteriorate. Following the publication of our last commentary, the performance of the US dollar index (a measure of the currency against major pee…
In our last commentary on the US dollar, we wrote that the buck was set to move higher given underlying economic trends. Specifically, US growth and inflation was likely to keep accelerating, while the opposite was likely to happen in most major regions outside the United States. Following the publication of our last commentary, the US dollar index has strengthened from around 91.80 to around...
In our previous commentary on the US dollar, we warned that a weak dollar was hiding significant risks in growth-sensitive assets such as equities and European currencies. As the world’s reserve currency, the buck is inversely correlated to most financial assets because most cross-border lending is conducted in dollars. Thanks to a slowdown in economic growth outside the United States coupled wit…