A rally in the US dollar is accelerating, as stubborn inflation sows doubts over how aggressively the Federal Reserve will be able to cut rates this year compared to other central banks.
The US dollar index, which measures the greenback against a basket of six major currencies, is up 4.6 per cent this year and stands near its highest levels since early November. The index rose 1.7pc last week, its biggest weekly gain since September 2022.
The greenback is advancing as market participants grow convinced the Fed will need to leave interest rates at current levels for longer to avoid a potential resurgence of inflation. Last week’s stronger-than-expected consumer price data bolstered that view: investors late Friday were pricing in just 50 basis points of interest rate cuts in 2024, futures markets showed, compared to 150 basis points priced in at the start of the year.
By contrast, investors believe some global central banks – including the European Central Bank, the Bank of Canada and Sweden’s Riksbank – could have a freer hand to ease monetary policy. That is a shift from a few months ago, when many believed the Fed would be among the first to cut rates.
“We had a fairly clear path that the Fed would likely be the first actor. The data that we have received really does undermine that,” said Eric Leve, chief investment officer at wealth and investment management firm Bailard. “I can see obvious reasons why the dollar could strengthen further.”
