U.S. dollar hits multi-month highs on hot economics and hawkish Fed

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Vrasidas Neofytou
Head of Investment Research

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U.S. dollar hits multi-month highs on hot economics and hawkish Fed

The U.S. dollar shines again as the DXY-U.S. dollar index, which tracks the value of the greenback against six major peers, hit a six-month high of 105 on Friday morning following the better-than-expected U.S. ISM Services PMI readings in August.

The U.S. services sector unexpectedly gained steam in August, rising at 54.5 vs 52.5 of the market expectation https://www.investing.com/economic-calendar/ism-non-manufacturing-pmi-176, fuelling concerns that inflation will remain hot in the near-term, boosting the dollar while causing a continued hawkish outlook from the Federal Reserve.

The strengthening dollar has sent the Euro and Pound Sterling to trade near 3-month lows of $1.07 and $1.2460 respectively, while the Japanese Yen fell to a fresh 10-month low of ¥147.90 per dollar following the ongoing Fed-BoJ monetary policy diverge and interest rate gap between Yen and Dollar.

DXY-U.S. dollar index, Daily chart

Hence, the resilient U.S. economy and the hot macroeconomic data have convinced investors that the Federal Reserve will reiterate its higher-for-longer rhetoric, supporting the dollar against its major peers.

According to the CME Fed Watch tool, market pricing shows a near 47% chance that the Fed might deliver another rate hike in November, though expectations are for policymakers to keep rates on hold later this month.

Beyond the macro factors, the U.S. dollar has also been receiving safe-haven bets as the global economic conditions deteriorated, especially in China (property crisis and yearly low imports and exports), the world’s second-largest economy, and Germany, the Eurozone’s largest economy.

Furthermore, the recent geopolitical tensions and trade bans between the U.S. and China have also weighed on the global risk sentiment, sending investors to the safety of the dollar.

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