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The dollar’s latest rally against other currencies looks set to push on.
An FX analyst noted that macro strength and Fitch’s recent US downgrade lay the groundwork for more gains.
The Fitch downgrade could play out similarly to S&P’s move in 2011, which sparked a multiyear run of gains.
The dollar is in the middle of a rally that could extend for years, bolstered by a strong macroeconomic picture and invigorated by the recent downgrade of the US’s credit rating by Fitch Ratings.
That’s according to FxPro senior market analyst Alex Kuptsikevich, who notes that the Dollar Index — which measures the strength of the buck against a basket of rival currencies — is hovering just above 102.6 early Thursday, well below its one-year high of 114.11. The rally began in the middle of last month, and stems from a recent run of positive macroeconomic news, including strong job growth.
“The dollar has recently been supported by robust macro data, including yesterday’s ADP report of a 324k increase in private-sector employment,” Kuptsikevich wrote in a note Thursday. “The largest weekly drop in commercial oil inventories also indicates domestic solid demand. The markets are now getting the message from the Fed that we don’t have to wait for a policy reversal soon and that rate hikes are not over yet.”
The dollar has mostly posted strong gains since the Federal Reserve began tightening policy, surging against rival currencies like the euro and the yen. Dollar strength can be a mixed bag, however, as US companies prefer a weaker dollar to encourage foreign countries to import more goods.
Markets believe that the July rate hike was the last of the current cycle and that the rest of this year’s policy meetings will hold rates steady before the central bank starts cutting in 2024. However, if inflation starts falling at a slower rate or even spikes up again, that would easily turn the Fed more hawkish again, which could in turn spur more gains for the dollar.
The Fitch downgrade of the US’s credit rating, meanwhile, has also breathed new life into the dollar rally, similar to how S&P’s downgrade in 2011 sparked a long run of gains for the greenback.
“As a first step, investors are getting rid of the weakest assets in their portfolios by buying more liquid Treasuries and the dollar. If the US’s image is damaged, it may take months for the overhang of selling to reach the most protective instruments,” he wrote.
He added that in 2011, following S&P’s downgrade, other countries fared even worse than the US, driving investors to Treasurys and the dollar.
“[T]he S&P downgrade of the U.S. triggered a multi-year rally in the dollar as other countries fared even worse, not to mention riskier corporate bonds. Something similar could happen this time around.”
To confirm a push above recent levels, the Dollar Index would have to reverse a downward trend that began last November.
“The 200-day moving average is near 103.40, and a move up to it from the current 102.5 may be a much easier task than consolidating above it,” he said. “But if it happens, the importance of this signal for FX and global markets must be emphasised.”