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The U.S. dollar has been on a sharp rise since the start of November and is about to record its best monthly gain in the last two years. The dollar index, which tracks the greenback’s strength against a basket of the other major currencies, soared to its highest level since April 2003 on Friday. The rally was driven by the outcome of the U.S. presidential election and speculations that the Federal Reserve will raise interest rates next month.
U.S. Treasury yields surged vigorously amid expectations that President-elect Donald Trump’s pledge to ramp up fiscal spending and cut taxes will spur economic growth and inflation. In large part due to rising demand for the U.S. dollar to buy U.S. government bonds, the currency’s price advanced over 5% against the Japanese yen and more than 3% versus the euro.
Additionally, U.S. data has been stronger with inflation rising and job growth increasing, which strengthened the case for the Fed to hike rate by the year’s end. In her testimony to the Joint Economic Committee last week, Fed chair Janet Yellen made it clear that the conditions are in place for a December tightening. Furthermore, she also expressed confidence in the progress that the economy is making toward the central bank’s inflation and employment goals. As a result, the market is now pricing in a 96% chance of a rate hike next month
In the week ahead, market players will be turning their attention to Wednesday’s minutes of the Federal Reserve’s November policy meeting, and to U.S. economic reports to gauge the health of the world’s largest economy, with Wednesday’s durable goods data in the spotlight. U.S. markets will be closed for the Thanksgiving holiday on Thursday.
Sterling had to give up its strength for the first time against the U.S. dollar in the last four weeks but extended gains versus euro and yen. A number of important U.K. economic reports were released last week with retail sales rising 1.9% in October, nearly four times stronger than expected. The unemployment rate was reported to decline to 4.8% and consumer price growth slowed.
Investors have not considered Brexit as an imminent threat since the British High Court’s recent decision on Article 50. The Supreme Court still needs to decide on the case. However, the decision will not be announced until next year.
Next week, the Office for National Statistics will report a second estimate on U.K. third-quarter economic growth on Friday, which is forecast to confirm the preliminary reading that indicated the economy grew 0.5% in the three months ended September 30. Ahead of the GDP report, Chancellor Philip Hammond will present his autumn budget statement to parliament on Wednesday.
Commodity currencies also lost ground to the mighty greenback. Among those, the best performer was the Canadian dollar, which was almost unchanged against the dollar as the currency was supported by a rebound in oil prices. In Canada, the most important economic report last week was consumer prices. According to the Statistics Canada, price pressures accelerated in October, lifting year-over-year CPI growth to 1.5% from 1.3%. Meanwhile, core price growth slowed slightly, ticking only 0.2% higher on a monthly basis. Canadian retail sales report will come out on Tuesday.
The Australian dollar plunged steeply in the second half of last week after initially having been supported by upbeat RBA minutes. The Aussie fell to the lowest level since late-June, dragged down by an overwhelming U.S dollar and mixed employment numbers, not to mention lower gold, copper and iron ore prices.
The New Zealand dollar tracked its Australian counterpart’s slide last week despite a batch of positive economic data including stronger service-sector activity, soaring consumer confidence index and a big jump in producer prices. There are no major economic reports scheduled for release next week for both countries except for trade data from New Zealand.