After a disastrous year, the U.S. dollar has finally shown signs of real progress. Earlier this month, the U.S. dollar index (DXY) jumped to its highest level since August on political support and weakness from other major currencies.
The dollar index, a measure of the greenback against a basket of six peers, reached a settlement high of 93.96 on 5 October. That followed a 2.8% gain over the previous month. Meanwhile, the euro, yen and Canadian dollar slipped. The British pound also showed weakness as Brexit uncertainty continued to hamper the weakened government of Prime Minister Theresa May.
Although U.S. jobs data have largely disappointed as of late, weak readings largely reflected a volatile hurricane season. In other words, investors are confident that the domestic jobs engine may hum once again in October and beyond.
The greenback caught a tailwind as details of the Republican tax plan emerged, raising confidence that stronger economic growth may follow. President Donald Trump’s tax cuts have been described as the most ambitious in 30 years. They include lowering the top income rate to 35%, slashing the corporate tax rate to 20% from 35% and a one-time repatriation of corporate profits held overseas.
The dollar bulls also rallied behind hawkish testimony from the Federal Reserve, whose policy-setting board has given strong signals that it will raise interest rates in December. Last month, Federal Reserve Chairwoman Janet Yellen reaffirmed expectations for a rate hike in December, saying it would be “imprudent” to keep monetary policy on hold until inflation reaches its 2% target.
“For these reasons, and given that monetary policy affects economic activity and inflation with a substantial lag, it would be imprudent to keep monetary policy on hold until inflation is back to 2%,“ Yellen told the National Association for Business Economics on 26 September.
The dollar has weakened a bit over the past two weeks, but continues to show resilience. This suggests that the worst of the dollar drought may be behind us. However, upward mobility will depend on several factors tied to global central banks and domestic inflation.