Resilient Economy Lifts Dollar To Six-month High

The U.S. dollar surged again in the week ended September 8, rising to levels last seen more than six months before, amidst data that reinforced the resilience of the U.S. economy. In its 8th successive week of gains, the greenback rallied against the euro, the British pound, the Australian dollar as well as the Japanese yen.

Services Sector PMI readings from the U.S. released on Wednesday that pointed to the strongest growth in the sector in six months heightened fears of the Fed keeping interest rates restrictive for longer. The ISM Services PMI unexpectedly jumped to 54.5 in August, versus 52.7 in July and expectations of 52.5.

Even though markets do not expect the Fed to raise rates in the FOMC on September 20, fears of the Fed keeping interest rates higher for longer and the consequent rise in bond yields fueled the Dollar’s rally. Fears of fuel-fed inflation and safe-haven demand amidst weak economic indicators in regions including China also abetted the Dollar’s surge.

The Dollar Index, a measure of the Dollar’s relative strength, gained more than 0.80 percent during the week ended September 8, rising to 105.09, versus 104.24 a week earlier. The DXY had earlier touched these levels in the middle of March 2023. The DXY ranged between a low of 104.03 and a high of 105.16 over the course of the past week.

The euro shed close to 0.70 percent against the dollar during the week ended September 8, closing at $1.0699, versus $1.0773 a week prior. The EUR/USD pair which had touched a high of 1.0810 at the commencement of the week, slipped to a low of 1.0686 towards the end of the week. The common currency was weighed down by concerns about whether the ECB has sufficient headroom to raise rates, given the recent disappointing economic updates. The ECB’s interest rate decision is due on September 14 and markets are currently not expecting a hike.

The pound sterling dropped close to a percent to the dollar during the same period amidst comments from Bank of England’s Governor Andrew Bailey that hinted at an end to rate hikes. Amidst the dovish shift, the GBP/USD pair dropped to 1.2464 from the level of 1.2588 at the end of the week ended September 1. Like the euro, the pound too slipped steadily over the course of the week, falling from the high of $1.2644 touched on Monday to the low of $1.2445 on Thursday.

The Aussie’s losses against the U.S. dollar were much more severe than that of the euro and the pound. The antipodean currency dropped 1.2 percent against the greenback, finishing the week at $0.6375. versus $0.6450 a week earlier. The AUD/USD pair ranged between the high of 0.6482 touched on Monday and the low of 0.6356 touched on both Tuesday and Wednesday. On Tuesday, in the final meeting under Governor Philip Lowe, the Reserve Bank of Australia had maintained status quo on its cash rate.

The yen too declined heavily against the U.S. dollar, closing 1 percent lower over the course of the week ended September 8. The USD/JPY pair ranged between the low of 146.01 touched on Monday and the high of 147.88 touched on Friday. The pair closed at 147.81, versus the level of 146.23 a week earlier. The yen’s weakness, amidst hints from a Bank of Japan official that ruled out an early end to the negative interest rate regime had also prompted warnings from the govt.

Much has changed over the weekend as Bank of Japan Governor Ueda’s comments that hinted at a likely monetary policy pivot and a potential shift from negative interest rates dramatically altered the currency market dynamics. The USD/JPY pair which dropped to as low as 145.91 earlier in the trade is currently at 146.53.

Also on the horizon are inflation updates from the U.S. on Wednesday, interest rate decision by the ECB on Thursday and the Fed’s interest rate decision on September 20. Amidst these influences, the DXY or Dollar Index has weakened 0.51 percent to 104.55. The EUR/USD pair has increased to 1.0744 whereas the GBP/USD pair has jumped to 1.2525. The AUD/USD pair has also strengthened to 0.6432.

Forex News