The dollar is about to notch its best week in two years. Geopolitical unrest, the odds of lower borrowing costs overseas and a resilient US economy are all spurring the world’s reserve currency higher.
The Bloomberg Dollar Spot Index is on track for a 1.6% gain this week, its best performance since September 2022 — when the Federal Reserve was still in the middle of its most-aggressive policy tightening campaign in a generation.
Now the dollar’s fate rests on how deeply the central bank unwinds those still high borrowing costs. The currency advanced for the fifth consecutive session Friday after a report showing healthy demand for US workers erased traders’ wagers on deeper interest rate cuts at the Fed’s November meeting.
“Signs that the labor market is more resilient than expected should help reduce aggressive Fed cut expectations,” said Aroop Chatterjee, a strategist at Wells Fargo. “Pricing for Fed cuts has been much more aggressive than other global central banks over the past couple of months.”
The Fed started its monetary-easing cycle with a half-point cut in September, leaving investors to pour over US data to gauge the health of the economy and scope of the policymakers’ next move. Lower rates usually lead to a weaker domestic currency.
Swaps traders are now factoring in a little less than 50 basis points of policy easing from the US central bank before the end of the year, down from more than 60 basis points on Thursday.
Expectations for other major central banks to keep policy loose and lower borrowing costs faster than the US further bolstered the dollar’s appeal. Bank of England Governor Andrew Bailey suggested policymakers in the UK could take a more aggressive approach to lowering rates.
In Japan, Prime Minister Shigeru Ishiba said the economy isn’t ready yet for further interest-rate hikes, sending the domestic currency tumbling. The Japanese yen has lost more than 4% against the greenback this week, making it the worst performer among developed economy peers and putting it on pace for the worst such period in nearly 15 years.
The conflict in the Middle East also drove investors to seek safety in haven assets, especially the greenback.
Still, the dollar’s rally comes shortly after it notched its worst quarter of the year amid expectations of further cuts. Meanwhile, traders have been piling into bets against the dollar, according to the latest available data.
In the week ended Sept. 24, non-commercial investors — a group of speculative market players that includes hedge funds, asset managers and other traders — added dollar shorts to $14.8 billion, that compares to some $9.3 billion a week earlier before the Fed cut rates, according latest Commodity Futures Trading Commission data. A new report is due later on Friday.
“The scale of the dollar’s rally in recent years and the prospect of further Fed rate cuts, suggest the primary trend will be down, but definitely not in a straight line,” wrote analysts at Societe Generale SA, including Kit Juckes.
Traders will now turn their focus to the next inflation report, due this coming Thursday.
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