Dollar Resurgence Suggests Potential for a Comeback

Market Trends - 27/09/2017

It has been a busy week for the US dollar as leaks about the yet-to-be-unveiled tax proposal and more hawkish commentary from the US Federal Reserve drive gains in the Greenback.  Year-to-date, the currency’s performance has been anything but positive.  The Dollar Index, which measures the dollar’s value against 6 peers, has fallen -8.60% since the outset of 2017 as a combination of policy challenges confronts the economy.

So far, the Trump Administration has been unable to push through the planned healthcare repeal package, with the latest proposal not even making it to the Senate floor for a vote, marking another setback after two previous failures.  However, the raised prospect of impending tax reform has helped improve confidence in the outlook, buoying the dollar after the currency index fell to its lowest point since 2015.  The more immediate development boosting USD's performance near-term is the monetary policy element.

In a speech delivered on Tuesday, Federal Reserve Chairwoman Janet Yellen plainly stuck to the more hawkish viewpoint accentuated by the FOMC earlier in the month.  Although inflation remains well below the Fed’s 2.00% target, Yellen appears firmly in the camp of keeping the foot on the gas when it comes to tightening monetary policy.  Apart from paring down the balance sheet which is set to begin next month, plans to raise rates once more before year-end have also garnered majority support from the Central Bank’s voting members.

Furthermore, financial markets are increasingly reflecting the possibility, with Fed Funds futures currently pricing in an 81.40% chance of a 25-basis point increase in the key rate during the December meeting.  With all these emerging tailwinds for the dollar, it is no surprise that the currency has room to move higher through the end of the year.  The increasingly positive backdrop for the dollar is keeping gold prices under pressure despite the Korean threat, raising the likelihood of a retreat to $1250 per troy ounce if the precious metal stays beneath the $1300 level.


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