A burst of US business activity lit a fire under the dollar midweek. The Bloomberg Dollar Spot Index climbed 0.6% on the day to its strongest level since the end of July, bringing its month-to-date gain to 1.4%. Treasury yields jumped after the release as inflation worries lingered, and every Group of 10 currency slid against the greenback.
Positioning is tilting bullish too. Options markets via risk reversals show demand for dollars across maturities, with short-dated sentiment the firmest since July. Broadly, investors are warming to a sturdier dollar backdrop and positioning for it to stick around.
The Federal Reserve delivered its first rate increase in three years last week, and officials have kept a firm line on inflation since. With oil prices still elevated and the data holding up, money markets are pricing in at least one additional 25 basis point move before year end, with an October hike seen as the likelier outcome.
"Fundamentals are lining up for more dollar upside here," said Bank of America foreign-exchange strategist Alex Cohen. "The upside PMI data serve as a reminder of the US economy's resilience. The trend in US data softness from the summer has abated, expected Fed hikes look more durable than elsewhere." ING's Francesco Pesole put it bluntly: "The Fed story is dominant," adding that "Hawkish Fedspeak is enough to keep dollar in demand."
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History is giving the dollar a nudge too. Using ISO weeks that start on Monday, Bloomberg's data indicate that over the past decade the dollar's strongest median weekly return typically occurs in September's last complete week. This year is tracking that playbook: the greenback is up 0.8% for the week beginning Sept. 21, which is treated as the month's last full week.
With the Fed hiking again, the rate gap between the US and major peers is widening, which supports the dollar's appeal. Elias Haddad, who oversees Brown Brothers Harriman's global markets strategy from London, said this backdrop benefits the greenback, adding, "US economic outperformance should keep the dollar supported."
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