US dollar reaches nearly 2-month high amid hawkish Fed expectations

The US dollar index rose to 101.24, marking its highest level in nearly two months, fueling expectations that the Fed will maintain its hawkish monetary policy.

The US economy remained strong and continued inflationary pressures and forecasts that the Fed will continue rising rates drove the demand for the dollar.

Investors shifted to cash amid the ongoing geopolitical risks in the Middle East, contributing to the rise in the dollar.

The US manufacturing Purchasing Managers’ Index (PMI) reached its 52-month highest at 57 and its services PMI hit its 59-month highest at 58.7.

Money markets expect the Fed to continue with a hawkish stance with a 70% probability to hike rates by 25 basis points next month.

Jane Foley, senior foreign exchange strategist at Rabobank, told Anadolu that the strong PMI data showed a level of economic vitality that could concern the Fed’s hawks.

“The impact of the data was magnified by yesterday’s rise in oil prices and remarks from the Fed’s (board member Michael) Barr that more rate rises might be needed — together these factors helped accelerate market forecasts for another Fed policy tightening as soon as next month which underpinned with value of the US dollar,” she said.

“While (the) ECB (European Central Bank) rate hike speculation is also prevalent in the market, upside potential for the euro is likely limited by the eurozone’s status as an energy importer, (while) next year’s French Presidential election may also be a limiting factor for the euro going forward,” she added.

Kyle Chapman, a foreign exchange markets analyst at the London-based Ballinger Group, told Anadolu that the dollar appreciated due to the Fed’s shift towards a more hawkish stance, weak risk appetite, and the ongoing strength of oil prices.

“US rates have risen across the curve after Warsh reaffirmed his commitment to monetary policy discipline,” he said.

Francesco Pesole from the ING Group stated that strong US PMI data, rising oil prices, and weak risk appetite contributed to the US dollar’s rise, while the currency’s move has started to look “stretched relative to fundamentals.”

“We are cautious in calling for a bottom in the dollar just yet because any upside surprise in upcoming US data releases can easily prompt markets to fully price in an October Fed hike and prop up short-term rates even more, but if this risk doesn’t materialize, we expect a correction in DXY (US Dollar Index) in the coming weeks, with a return to the 100-100.5 area,” he said.

“USD/JPY remains another source of potential downside risk for the dollar — the rapid rally in the pair may draw Japanese authorities to intervene that could easily spill over into a weaker USD across the board,” he added.