Premature to say greenback has peaked

THE US Dollar Index (DXY), a measure of USD value against a basket of currencies used by US trading partners, has been on a tear in 2022, up more than 15 per cent year-to-date, fuelled by the US Federal Reserve’s hawkish moves. The DXY continues to be volatile, first gaining from the bullish impact following the Federal Open Market Committee (FOMC) meeting, then erasing its gains after release of the non-farm payrolls (NFP) report. The DXY continued to extend its losses with appetite for risk assets remaining strong as traders weighed the outcome of the US mid-term elections. With the Dollar Index making a series of lower highs recently, a question on everyone’s mind is: “Has the greenback topped out”?

Following the fourth consecutive hike of 75 basis points by the Fed in the November FOMC meeting, dollar buoyancy continued, with the meeting extending market anxiety rather than offering relief as the committee warned that a longer regime of tightening would follow. Fed chair Jerome Powell quashed any hopes of a long-anticipated pivot in monetary policy when he said: “The question of when to moderate the pace of increases is now much less important than the question of how high to raise rates and how long to keep monetary policy restricted, which really will be our principal focus.” His words were a clear signal that the Fed still had a long way to go on interest rates and it was premature to talk about a pause in rate hikes.

The conclusion of the November FOMC meeting was immediately followed by the release of the Nonfarm Payrolls (NFP) report, which saw US Treasury yields and the dollar taking a whiplash before heading lower. Data published by the US Bureau of Labor Statistics revealed payrolls rose by 261,000 in October, much higher than the market expectation of 200,000, a sign of continued strength in the US job market despite heightened economic uncertainty due to rising interest rates and persistently high inflation. The market, however, focused on flashing signs of a slowdown resulting from a higher unemployment rate and lower wage inflation. The unemployment rate edged higher to 3.7 per cent from 3.5 per cent and annual wage inflation, as measured by average hourly earnings (a key inflation gauge closely monitored by Fed policymakers), declined to 4.7 per cent from 5 per cent previously, matching forecasts. Fed officials also commented that a smaller rate increase remained on the table for the December policy meeting.

Looking at the chart for DXY, we can see continued compression after the price set a series of lower highs. The peak-high came in late September as the British pound slumped, and then had a double top resistance of 113.92 before pulling back recently. Currently, the DXY is forming a bullish flag pullback formation into the key uptrend support line and the 100-day simple moving average (SMA), which the Index has stood above so far this year.

All in all, with Fed chair Powell guiding for the terminal Fed funds rate to remain higher, as the inflation picture has become “more and more challenging” in his words, US Treasury yields will continue to get pushed up along the way and the greenback could retain leadership in the forex market.

Going back to the question from the beginning, the answer can be found in Powell’s words: “It is very premature to be thinking about pausing … very premature.” In a similar sense, it would be premature to conclude that the dollar has peaked without further changes in macroeconomic conditions.

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The writer is research analyst at Phillip Securities