The US dollar has been bearish since October as Fed rhetoric softened, inflation subsided and rate hikes slowed. But the U.S. dollar has seen a sizeable rally over the past two weeks, which surprised some analysts as many expected the Fed to start cutting rates later this year. However, the Federal Reserve may take more steps in the near future. This week, we heard comments from Fed members about rate hikes resurfaced.
“We’re not there yet,” Logan said this week after hearing from Wall Street Journal Fed insider Nick Timiraos that the Fed could continue to raise rates further. I outlined my comments. Dallas Fed President and Influential Fed Policy Board Member Laurie Logan Supports Raising Base Fed Funds Rate by 0.25% at June 13-14 Meeting Barring Significant Economic Downturn suggested that it might. Another Fed governor, Philip Jefferson, has presented arguments that could justify either keeping rates on hold or raising them again in June.
Several factors may contribute to the current situation. First, US debt ceiling negotiations, bank health, and concerns over the global economic outlook have increased the perception of the US dollar as a safe haven currency. The dollar index, which measures the U.S. currency against six other currencies, has risen about 2% since mid-April, but is still about 10% below its 20-year high last September.
Currency strategists commonly attribute the dollar’s strength to the ongoing debt ceiling debate. Democrats and Republicans are making progress toward a deal to raise the $31.4 trillion borrowing limit, but the risk of a potential U.S. debt default remains looming. This uncertainty is exacerbated by concerns over the stability of many banks. The recent strength of the US dollar is largely driven by these unknowns increasing demand for safe haven assets. Additionally, worrying signs about global economic growth may also be contributing to increased demand for safe-haven currencies. Recent data from China, for example, revealed a slowdown in the Chinese economy in April.
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