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The U.S. dollar has been hovering near one-and-a-half month highs against a basket of major currencies, as investors respond to strong economic data and indications from the Federal Reserve that interest rates will continue to rise.
U.S. Dollar Index Hits Highs
The U.S. dollar index, which measures the greenback’s strength against a basket of six major currencies, reached an overnight high of 95.78 on Thursday morning, marking its highest level since August 20. As of 03:43 AM ET (07:43 AM GMT), the index stood at 95.57.
Data released on Wednesday showed that U.S. service sector activity accelerated to a 21-year high in September, while another report indicated that private sector hiring increased at the fastest pace in seven months during the same month. These robust economic indicators have contributed to a surge in Treasury yields and expectations of further interest rate hikes by the Federal Reserve.
Fed Chairman Jerome Powell’s Comments
In an interview on Wednesday, Federal Reserve Chairman Jerome Powell emphasized that while interest rates are still accommodative, they are gradually moving towards a "neutral" setting. According to Powell, this neutral level would neither stimulate nor constrain economic growth. However, he also noted that the Fed may raise interest rates above this estimated neutral setting as the U.S. economy continues to grow.
Powell’s comments have added to the anticipation of further interest rate hikes by the Federal Reserve. This has led to a spike in Treasury yields, with 10-year notes reaching seven-year highs overnight. The strong economic data and hawkish Fed commentary have bolstered expectations for additional rate increases in December and beyond.
Currency Markets React
The euro has been trading at one-and-a-half month lows against the dollar, with EUR/USD falling to 1.1477 on Thursday morning after slipping 0.61% on Wednesday. Initially, the euro had risen on Wednesday due to reports that Italy plans to cut its budget deficit after next year, easing concerns over a wider deficit. However, these gains were reversed as investors focused on the strong U.S. economic data and Fed commentary.
The dollar has also retreated against the yen, with USD/JPY down 0.26% to 114.23 after hitting an eleven-month high of 114.53 on Wednesday. Conversely, the pound has moved higher against the dollar, with GBP/USD adding 0.21% to trade at 1.2968 after falling to a three-and-a-half week low of 1.2921 overnight.
Market Implications
The U.S. dollar’s strength is a result of investors’ increasing confidence in the U.S. economy and expectations for continued interest rate hikes by the Federal Reserve. This trend may persist as long as strong economic data continues to be released and Fed commentary remains hawkish.
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Conclusion
In conclusion, the U.S. dollar has reached near one-and-a-half month highs against a currency basket due to robust economic data and indications from the Federal Reserve that interest rates will continue to rise. The strong economic indicators have contributed to a surge in Treasury yields and expectations of further interest rate hikes by the Fed. As investors navigate the market, it is crucial to consider multiple factors and conduct thorough research before making investment decisions.