Data spurs dollar index, DXY eyes 3rd month of growth

Blockbuster data puts dollar index on track for 3rd consecutive monthly gain

The U.S. dollar strengthened on Friday and is poised for its third consecutive monthly gain. Robust U.S. economic growth data released yesterday has pointed to the Federal Reserve (Fed) likely keeping interest rates at elevated levels as it attempts to cool down the economy.

GDP figures released by the Bureau of Economic Analysis indicated that the U.S. economy expanded at an annualized rate of 4.9% — its fastest pace in nearly two years in Q3 2023. The growth was boosted by higher wages resulting from a tight labor market, which in turn fueled consumer spending. The GDP news, coupled with another round of strong business activity surveys, have reinforced expectations that the Federal Reserve will maintain a restrictive monetary policy for an extended period — a stance now widely known as “higher for longer”. Buoyed by the data, the U.S. dollar traded broadly higher throughout the week.

The U.S. dollar index fell briefly by 0.2% to reach 106.4 on Friday, following a three-week high of 106.89 in the previous session. It is currently on track to record a weekly gain of close to 0.2%.

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DXY index: Dollar strengthens against all major currencies

The euro briefly bounced back by 0.2% to trade at $1.0583 on Friday, but earlier losses put it on track for a weekly decrease of 0.12%.

As anticipated, the European Central Bank (ECB) decided to keep interest rates unchanged on Thursday, ending a historic run of 10 consecutive rate hikes that began in July 2022. Data released earlier in the week revealed an unexpected downturn in business activity across the eurozone.

Meanwhile, the British pound saw a 0.2% drop against the dollar to trade at $1.2108, just above the three-week low of $1.2070 recorded on Thursday.

USD forecast: ING says case for stronger dollar “continues to consolidate”

In an overview of forex markets on Friday, ING FX Strategist Francesco Pesole wrote that U.S. exceptionalism continues to dominate the economic outlook. The economist also sounded a note of caution, saying that the greenback was likely overbought and may see less and less upward momentum:

“The dollar’s reaction [to higher GBP figures] was quite muted: we don’t think this was due to any impact from the ECB, but rather to the 3Q US PCE figures, which came in lower than expected at 2.4%, and potentially jobless claims climbing back to 210k. There is also a building trend for the dollar to find less and less upward momentum after some strong releases. That is consistent with the overbought condition of the greenback and the notion that we might be close to the peak in US activity data optimism. In this sense, we could see data outside of the US (i.e. in the eurozone or in China) having a greater impact on global market dynamics as they have done in the past few weeks.

Still, when we strip out the immediate market impact of the data releases, the case for a stronger dollar continues to consolidate. If personal income and PCE figures for September fail to steer the FX market drastically today, we still feel that the dollar may stay broadly supported into the weekend, and we would favour fading any (USD-negative) position-squaring upward correction in the crosses.”

At the time of writing, the DXY index traded at 106.43, down 0.16% on the day, as per MarketWatch data. Despite the decline, the dollar index was still on track to post an 0.25% increase for the week.

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