The US Dollar’s bullish streak has been broken, as the Dollar index (DXY), which is the benchmark of the Dollar’s strength against a basket of other currencies, shed nearly 4% in the last 5 days. The respite comes amid lower-than-expected CPI figures and a mixed NFP report.
Excluding this latest price drop, the Dollar had been gaining strength drastically since the beginning of 2022 under the backdrop of aggressive interest rate hikes. The Federal Reserve has been tightening its monetary policy and raising rates over the past several months to tame inflation, which is near levels last seen in the 1980s.
Another reason for the greenback’s dramatic rise is its status as a “safe haven” asset. Investors tend to turn towards high-yielding currencies like the Dollar when there are recession fears and equity markets are declining.
As of now, although the Dollar has slightly turned the direction downward, it is still trading around a two-decade high compared to other major currencies.
The recent CPI report pushes the DXY down as inflation eases
According to the CPI report released this Thursday by the Bureau of Labour Statistics, US inflation has begun showing indications of moderation. The consumer price index, which stipulated October’s inflation data, climbed 0.4% on a monthly basis and 7.7% from a year ago. These figures missed estimates of month-to-month at 0.6% and year-on-year at 8.0%.
In response to the optimistic data, the DXY sharply turned to the downside, falling to the 108 level immediately as U.S. Treasury yields retreated. At the same time, traders welcomed the rebound of US equity indices, including the S&P 500 and the tech-heavy Nasdaq, which gained thousands of points amid signs of mitigating inflation.
Furthermore, earlier this month, the FOMC meeting and NFP data release also jolted the DXY. While the FOMC decision pushed the Dollar upward, US nonfarm payroll numbers wiped away all of these gains, despite the numbers being better than expected.
Is the US Dollar’s bullish run ending now or will it continue?
The subsiding inflationary pressure may lead the Fed to decelerate the pace of interest rate hikes over the next months, which might pull down the Dollar’s strength. Investors are now hopeful that the upcoming December meeting might only introduce a 50 BP adjustment – instead of the originally planned 75 BP hike.
But even with the slowing inflation rate, this percentage is still well above the Fed’s 2% target. Moreover, one month’s positive reports are not significant enough to make a substantial change in the Dollar’s strength, considering the number of factors involved in this equation.
To conclude the story, while the Dollar’s bullish run might come to a slight halt in November due to less positive CPI data, it has probably not climaxed as the Fed’s stance is still hawkish. On the flip side, many experts believe that the Dollar’s upside rally is at its “later stages”, as the greenback has become extremely overvalued against currencies like the Japanese Yen and British Pound.
In a nutshell, it can be said that the Dollar’s bullish stride may slow down over the coming months, but it’s far from being over. It will probably take more than just one month’s data for the Fed to make a complete turn.
