The U.S. Dollar Index (DXY) has surged from the crucial 104 support level to the present 105.60 mark over the past two weeks. The confluence of central bank actions in Europe and a recent flurry of comments from U.S. Fed officials suggests the greenback could be poised to display continued strength in the near term.
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Major Central Banks Move Towards Lower Rates
The Swiss National Bank recently opted for its second consecutive rate cut. Switzerland joins the ECB (European Central Bank) and the Bank of Canada in moving towards easing monetary conditions.
The Fed Maintains Its Stance
On the other hand, the U.S. Fed has stuck with its wait-and-watch approach before taking interest rates a notch lower. At present, interest rates in the U.S. are at their highest level in over two decades. While the central bank has indicated a rate cut on the cards for 2024, much will hinge on the macro data prints until September. Additionally, the Fed has raised its inflation forecast for 2024 to 2.8% from 2.6%.
This week, Thomas Barkin, a voting member of the FOMC (Federal Open Market Committee), noted that further conviction on the inflation front may be needed before going for lower rates. Earlier, Alberto Musalem, the President of the St. Louis Fed, clearly indicated that rate cuts in the U.S. could be delayed for quite some time and it may take quarters instead of months for convincing data points to emerge. Musalem added that additional rate hikes could be warranted if inflation stalls at current levels or starts moving higher again.
What Is the Outlook for DXY?
Last week, the U.S. Fed lowered its interest rate cut projection to only a single rate cut from the earlier expectation of three rate cuts this year. Consequently, the DXY is on a strong footing. This strength looks set to continue as geopolitical tensions in the Middle East, Ukraine, and Asia further boost the dollar’s safe-haven appeal.
Consequently, the DXY could retest the 106.5 level over the coming weeks.
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