The US dollar remains king of the FX heap, with the Dollar Index (DXY) hitting its highest level since November 2022. As can be seen from the daily chart, the DXY has broadly kept within the boundaries of an upwardly-sloping trend channel since July this year. The big question is whether it has further to run to the upside or if it’s due a correction.
It’s getting support from the US Federal Reserve’s ‘higher for longer’ approach on interest rates, where the central bank’s fight against inflation continues. Certainly, the market is, belatedly, pricing in higher rates as the sharp move up in Treasury yields at the longer end of the curve proves. Once again, after years of calling the Fed’s bluff on interest rates, and forcing the central bank’s hand, the bond market finds itself having to adjust to Fedspeak rather than the other way round. And as recent data suggest, there are no obvious signs that the US economy is heading into a recession, which was the big reason that many thought earlier this year that the Fed would be cutting by now.
Now we’re hearing anguished cries that the Fed is ‘breaking something’ and will be forced into a swift about-turn, from hawkish to dovish. There are memories of the breakdown in the regional banks back in March, and fears that with rates even higher now, refinancing debt could be a insurmountable problem. After all, there are still a significant number of ‘zombie’ companies that relied on the monetary and fiscal stimuli over the last fifteen years.