By Paulo Trevisani
The dollar is gaining against major currencies after global central bankers recently reinforced their pledge to keep interest rates high for as long as needed to cool down price increases.
The U.S. economy is running stronger than its peers, meaning rates may need to remain higher for longer than previously expected, giving the dollar an advantage versus other developed-world currencies.
The WSJ Dollar Index, which tracks the greenback against 16 other currencies, is on pace for its highest close since November, when it finished at 99.34.
“Key to USD strength seems to be economic divergence,” said Marc Chandler, managing director at Bannockburn Global Forex. He expects both the euro and the pound to weaken versus the dollar. The greenback is consolidating after losing ground late last week, he said.
Another FX index, ICE’s DXY, is approaching its highest close since May, when it finished at 104.326. It is a narrower gauge, measuring the dollar against the Japanese yen, the British pound, the Canadian dollar, the Swedish krona and the Swiss franc.
At the Jackson Hole Symposium last week, Federal Reserve Chairman Jay Powell renewed his pledge to bring inflation down to 2%. It has been sticky around 4%. He also said economic indicators paint an economy still running too hot to make the Fed confident the target is in sight.
The path of monetary policy is pegged to upcoming data. Key U.S. gauges are expected to show the economy remains resilient, but the flow of indicators also make foreign-exchange rates more volatile.
On Tuesday, June’s S&P CoreLogic Case-Shiller Home Price Index showed home prices rising for the fifth consecutive month, although at a slower pace than in May. The dollar indexes declined after the data release.
Inflation and labor data due later this week are forecast to indicate that the Federal Reserve’s aggressive cycle of rate increases has yet to cool economic activity enough to ensure prices don’t rise faster than 2% a year. The target could take a long time to hit, and that would be a long-term tailwind for the dollar.
“The key reason for the dollar strength is that U.S. rates will be higher for longer,” said Torsten Slok, chief economist at Apollo Global Management.
The U.S. economy hasn’t been as responsive to Fed hikes as expected, so monetary policy would need to remain tight, Slok said. “That means that U.S. rates are going to be more attractive relatively to rates abroad,” he said.
Write to Paulo Trevisani at firstname.lastname@example.org
(END) Dow Jones Newswires