The US dollar gained ground against its major rivals on Tuesday, as upbeat economic data boosted expectations of a hawkish stance from the Federal Reserve. Investors are also looking forward to Fed Chair Jerome Powell’s speech on Thursday for clues on the central bank’s tapering plans and interest rate outlook.
US Business Output Rises in October
According to the flash purchasing managers’ index (PMI) released by IHS Markit, US business output rose in October, as the manufacturing sector expanded at the fastest pace in six months and the services sector rebounded from a five-month low. The composite PMI, which measures both sectors, increased to 55.5 from 54.9 in September, indicating a solid pace of growth.
The report also showed that inflationary pressures eased slightly, as input costs and output prices moderated from their record highs in September. However, supply chain disruptions and labor shortages remained major challenges for businesses, hampering production and delivery times.
The PMI data suggested that the US economy started the fourth quarter on a strong footing, despite the headwinds from the Delta variant of the coronavirus and the uncertainty over fiscal policy. The data also reinforced the case for the Fed to start scaling back its massive bond-buying program soon, possibly as early as November.
US Dollar Index Climbs Above 106
The positive economic data lifted the US dollar index, which measures the greenback’s performance against a basket of six other currencies, to a six-month high of 106.32 on Tuesday. The index has gained more than 5% since mid-July, as the Fed signaled that it could begin tapering its asset purchases this year and raise interest rates next year, ahead of other major central banks.
The dollar was particularly strong against the euro, which fell to $1.0538, the lowest level since December 2022. The euro was weighed down by disappointing PMI data from the eurozone, which showed that business activity slowed in October due to supply chain bottlenecks and rising COVID-19 cases. The European Central Bank is expected to keep its monetary policy unchanged at its meeting on Thursday, maintaining its ultra-loose stance.
The dollar also rose against the yen, reaching 149.98, the highest level since November 2022. The yen was under pressure from the widening interest rate gap between the US and Japan, as well as the risk of intervention by Japanese authorities if the currency weakens too much. The Bank of Japan is widely expected to maintain its negative interest rate and massive stimulus program at its meeting on Friday.
Powell’s Speech in Focus
The main event for the dollar this week will be Powell’s speech at a virtual conference hosted by the European Central Bank on Thursday. Powell is likely to reiterate his view that inflation is transitory and that the Fed will move carefully and gradually in adjusting its monetary policy. However, he may also acknowledge that the economy has made substantial progress toward the Fed’s goals and that tapering could start soon.
Investors will be looking for any hints on the timing and pace of tapering, as well as Powell’s assessment of the risks posed by rising energy prices, supply chain disruptions, and fiscal impasse. Any hawkish signals from Powell could boost the dollar further, while any dovish remarks could trigger a pullback.
