The US dollar extended its gains, sending the currency toward its longest rally in years as the strength of the economy fuels speculation the Federal Reserve will keep interest rates elevated.
(Bloomberg) — The US dollar extended its gains, sending the currency toward its longest rally in years as the strength of the economy fuels speculation the Federal Reserve will keep interest rates elevated.
The expectation is drawing money into the US as investors seek higher rates than they can get in Europe and Asia, exerting upward pressure on the dollar.
The Bloomberg Dollar Spot Index, which is heavily weighted against the euro and yen, edged up Thursday, extending a three-day advance that’s pushed it up nearly 1%. That’s put it on track for its eighth weekly gain, the longest since the index begins in January 2005. The ICE dollar index has seen a similar jump, leaving it poised for the longest advance in 9 years.
The rally reflects the fissures that are opening in the global economy, with reports signaling that the US economy is accelerating even as growth cools in Europe and China and markets anticipate rate cuts in the developing world.
The gap was underscored on Wednesday, when the ISM service-sector index for August rose to a six-month high, bolstered by a pickup in new orders and hiring. On Thursday, initial claims for unemployment benefits unexpectedly fell to the lowest since February.
“Right now, the US economy is so resilient and the European data are so soft, it’s a recipe for dollar-strength overshoot,” Societe Generale strategist Kit Juckes said.
A widely-followed estimate produced by the Atlanta Fed shows the US economy is expanding 5.6% on an annualized basis this quarter. That’s leading economists to expect that central bank officials will double their growth projection for 2023 when they publish an updated outlook later this month and scale back estimates for interest-rate cuts next year.
As a result of the growth, markets are pricing in that interest rates in the US will remain above those in the euro-zone and many other major economies.
“We definitely have a combination of global growth weakening, particularly in Europe, followed by China — and then we’ve got what appears to be resilience in the US economy,” Matthew Hornbach, global head of macro strategy at Morgan Stanley, said on Bloomberg Television. “The rate differential story does benefit the US dollar.”
The recent rally has pushed the currency back toward this year’s peak, though it remains down from the record levels hit in late 2022.
Even so, the renewed strength has prompted authorities in China and Japan to step up efforts to defend their currencies, while several European Central Bank Governing Council members advocated for further rate increases sooner rather than later. All major currencies tracked by Bloomberg are down against the greenback so far this week.
“FX talk is cheap if it doesn’t come with convincing data or market conditions that support decisive and meaningful actions,” said Edward Moya, senior market analyst at OANDA Corporation, a provider of Internet-based foreign-exchange trading.
He said such efforts to bolster currencies have had little impact, with Japanese officials only about “halfway through their best verbal intervention threats,” the property crisis weighing on China’s outlook, and Germany posting “disastrous” factory-order data.
–With assistance from Anya Andrianova and Carter Johnson.
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