The DXY has been bouncing for 2 weeks

USD Starts A Bullish Reversal As FED Rate Hike Talk Comes Back

Posted Sunday, May 21, 2023 by
Skerdian Meta • 2 min read

The USD has been bearish since October as the FED rhetoric softened up and they slowed down with rate hikes, with inflation cooling off. But in the last two weeks we have seen a decent rebound in the USD, which has caught some analysts by surprise, as many were expecting the FED to start cutting interest rates later this year. Although, there is a possibility that the Federal Reserve has more actions to take in the near future. This week we heard rate hikes comments resurface from FED members.

We heard from the FED insider Nick Timiraos of Wall Street Journal say that the FED might continue to raise rates further, outlining comments from FED to Logan from this week where she said “We aren’t there yet”. Lorie Logan, the Dallas Fed President and an influential member of the Fed’s policy-setting committee, suggests that unless there are significant economic downturns, she may support a 0.25% increase in the benchmark federal-funds rate at the June 13-14 meeting. Another Fed governor, Philip Jefferson, presents arguments that could justify either keeping rates unchanged or raising them again in June.

Several factors are likely contributing to the current situation. Firstly, concerns surrounding the U.S. debt ceiling negotiations, the health of banks, and the global economic outlook have enhanced the perception of the U.S. dollar as a safe-haven currency. The dollar index, which measures the U.S. currency against six others, has increased by approximately 2% since mid-April, although it remains around 10% lower than its 20-year high from last September.

Currency strategists commonly attribute the strengthening of the dollar to the ongoing debt-ceiling debate. While Democrats and Republicans are making progress in reaching an agreement to raise the $31.4 trillion borrowing limit, the risk of a potential U.S. debt default still looms. This uncertainty is compounded by concerns about the stability of many banks. The recent strength of the U.S. dollar is primarily driven by increased demand for safe-haven assets due to these unknowns. Additionally, worrisome indications regarding global economic growth may also be contributing to the increased demand for safe-haven currencies. Recent data from China, for example, revealed underperformance in its economy during April.

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