US Dollar – Is The Rally Coming To An End?

The US dollar has rallied since early Q3 back to levels last seen on either side of December last year as the Federal Reserve tightened monetary policy by hiking interest rates ever higher. The Federal Reserve left rates unchanged at its September meeting but warned that there could be another rate hike if economic conditions warranted it. While the September meeting had an overall hawkish tone, Chair Powell said that the US central bank would ‘proceed carefully’ when assessing if additional policy firming is required. Chair Powell used the same wording at the recent Jackson Hole Symposium in his keynote speech. This flexibility leaves the Fed room to keep rates unchanged for the rest of the year if deemed necessary.

See the Latest US Dollar Q4 Outlook

The US dollar has been a one-way trade since the middle of July, rallying in excess of 6% since printing a 99.49 low. The US dollar index has been helped by Euro weakness – the Euro accounts for around 58% of the basket – and ongoing weakness in the Japanese Yen (13.5% weighting). The Bank of Japan recently said that it may be in the position at the end of the year to start to dial back its current ultra-loose monetary policy, a move that would increase the value of the Yen. The ECB may hike interest rates once more this year and while this may not increase the value of the Euro to any major extent, if the single currency settled around current levels for the next few months, any US dollar upside would be limited.

It is always dangerous to try and predict future central bank decisions but the recent round of rhetoric from various G7 bankers suggests that global rates are at, or are very close to, their peaks.

Looking at the US dollar index daily chart, further upside looks possible. It may be that this upside is limited though with a cluster of prior highs back in November 2022 around 106.84 providing the next level of resistance. Under current market conditions, this is likely to hold. It is difficult to sell an asset when it is rallying, even one that you believe will fall soon. Any rally to the 106.84 level could provide an opportunity to sell the US dollar in the coming quarter.

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US Dollar Index Daily Chart