Dollar rockets toward 2024 record amid inflation, Fed watch

The dollar is rising toward a new high for the year on speculation that Wednesday’s US inflation reading and Federal Reserve policy decision will increase demand.

The Bloomberg Dollar Spot Index rose Tuesday for a fourth straight session, climbing a total of 1.2% in that period, amid help from last week’s report of US jobs growth and political turbulence in Europe. The gauge now trades about 0.3% below this year’s peak reached on April 9, and is poised to end the day at the highest level in more than seven months.

“Tomorrow presents a real opportunity for the dollar to extend its recent gains, Powell permitting,” Patrick Locke, an FX strategist at JPMorgan Securities LLC in New York, said in an interview. “There are reasons to expect both CPI and FOMC will err on the bullish/hawkish side for the dollar, helping it sweep the tactical trifecta,” he said, referring to the coming consumer price index and Federal Open Market Committee reports and Friday’s above-estimate non-farm payrolls. 

Wednesday offers a rare instance where “a critical macro input” lands on the same day as FOMC unveils its dot plot, Locke noted, adding that the dollar tends to outperform around meetings with dot-plot releases relative to those without.

Market economists and traders’ expectations are oscillating between one and two quarter-point rate reductions before year-end, compared with three cuts projected by the Fed in March. “The real test will be whether two cuts are taken out for this year, or if there are punchy upgrades further out the forecast horizon,” he said.

Dominant Dollar

The greenback’s strength is likely to persist for months.

The first round of the French legislative election will take place on June 30 and “nobody is going to want to hold European assets into the vote,” Brent Donnelly, president of Spectra FX Solutions LLC and a veteran FX trader, wrote in a note. “Pressure on the euro and peripheral debt could continue because people are scarred from too much complacency on Mexico elections.”

Mexico’s peso has dropped after President-elect Claudia Sheinbaum said a proposed reform of the nation’s judicial system would be among the first to be discussed in congress, spooking investors who worry it will erode checks on the ruling party. 

Donnelly said that traders will likely “overreact to the European news after initially under-reacting to the Mexico news,” a potential blow to the euro and boon for the dollar.

“The dollar is the vol trade for FX in my opinion,” Mark McCormick, global head of FX and EM strategy at Toronto Dominion Bank told Bloomberg TV on Tuesday, adding that he has “massively upgraded” his view on the currency into the second half. “There’s really no more safe havens. The dollar is the only place to go.”