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US Dollar Index: DXY Grinds To a Six-Week High Above 104.00 As Fed Hawks Drive The Market
The US Dollar Index fluctuates near a multi-day high due to the Federal Reserve's hawkish tendency. Positive US data push Treasury bond rates and Federal Reserve wagers for a higher policy reversal. Fed policymakers emphasize their willingness for additional rate increases. The US-China tale increases market anxiety and strengthens demand for the US Dollar as a safe haven.
In early Friday trading, the US Dollar Index (DXY) posts modest gains near 104.15 as bulls flirt with the six-week high. Yet, the hawkish Federal Reserve (Fed) speech and positive US statistics, as well as US-China tensions, could be considered to have played significant roles in depicting the DXY's three-day advance.
The US Producer Price Index (PPI) for January drew significant attention on Wednesday, as its 0.7% MoM increase was the largest since June. Particularly encouraging was the improvement in US Initial Jobless Claims for the week ending February 10, which came in at 194K compared to 200K projected and 195K previously. In contrast, the January decline in Housing Starts and the February Philadelphia Fed Manufacturing Survey seems to have garnered some notice.
Following the release of the data, James Bullard of the Federal Reserve Bank of St. Louis and Loretta Mester, president of the Federal Reserve Bank of Cleveland, expressed their hawkish bias and supported the dollar. Among them, Bullard of the Federal Reserve stated, "Continued policy rate rises can help lock in a disinflationary trend in 2023, even with sustained growth and healthy labor markets, by keeping inflation expectations low." In the same vein, Fed's Mester stated that the Fed will need to move over 5% and remain there for some time. The policymaker noted that she is unable to say whether the Fed requires a larger rate hike at the next policy meeting, but that she does not wish to surprise the markets.
Notably, the most recent FEDWATCH report from Reuters indicates that the interest rate futures market indicates US interest rates could peak near 5.25 percent in July before falling to 5 percent by the end of the year. The same indicates a bigger policy reversal than the Fed's December peak of 5.10%, which in turn suggests a few more rate hikes from the Fed and benefits US Dollar bulls.
On a separate page, the fresh US-China tensions and Russia's refusal to back down when it comes to attacking Ukraine further weigh on risk appetite and the EUR/USD exchange rate due to the demand for the US Dollar as a safe haven. During an interview with NBC News, US Vice President Joseph Biden fired shots at his Chinese counterpart while relaying expectations for a conversation with the Chinese leader. According to Reuters, US President Biden stated, "I believe the last thing Xi wants is to fundamentally rupture the relationship with the United States and with me."
Wall Street closed with a loss, while S&P 500 Futures were down 0.30 percent intraday as of press time. It should be noted that the rates on 10-year US Treasury bonds surged to their highest levels in 2023 with the most recent print of 3.86 percent, while the yields on 2-year US Treasury bonds also rose to their highest levels since November 2022, closing the day at 4.64 percent.
A light calendar on Friday can put the DXY bulls in the driver's seat ahead of next week's Monetary Policy Meeting Minutes for the Federal Open Market Committee's (FOMC) most recent action, given the additional fuel to the hawkish Federal Reserve fears, backed by positive US data.
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