Dollar Dominance: Five Weeks of Gains and Counting

Hawkish Fed Expectations and Global Dynamics Drive USD Strength

• Dollar extends its five week run of weekly gains, up 1.8% vs the G10 currencies.
• The Fed is likely to turn more hawkish, with the market moderating bets on another rate cut in December.
• Currencies expected to remain range bound in the coming days/weeks.

It’s a wrap

It’s been a bumpy ride, but the dollar has extended its gains for a fifth straight week, ending 1.8% stronger against the other G10 currencies. The gains aren’t unexpected following the Republican sweep of the White House, Senate and House, increasing the likelihood of tax cuts, tariffs and increased defense spending – all inflationary pressures. With prices potentially headed back up, the market is anticipating that the Fed’s monetary policies will likely shift, with their rate cutting cycle giving way to either constant interest rates or even tightening should inflation run too hot.?

At the beginning of the week, the probability of another interest rate cut at the Fed’s final meeting of 2024 in mid December, was as high as 82%. Those odds have since cooled to just 57%. Regardless of what the Fed decides come the December FOMC meeting, anticipate more a more hawkish outlook come the new year.?

The EUR is at its weakest level in a year, but traders still haven’t tested the 1.06 support level. However, with the incoming Trump administration, expectations of tighter US monetary policy, and with the proposed tariffs likely to weigh on the European economies, there’s a strong case for the common currency to weaken further. A break below 1.06 would be the first shoe to drop, with a retest of dollar parity likely not long to follow.?

A look ahead to next week

Next week is light on economic data with new housing data due on Tuesday, expected to show moderate growth m/m. Weekly jobless claims and existing home sales are due on Thursday, and consumer sentiment and S&P services and manufacturing indices due on Friday.

The market is keeping an eye on the early moves the incoming Trump administration is already making, including nominees for key positions within the Cabinet. With the House now locked up in the Republican’s favor, we may also begin to see the groundwork for Trump’s policy platform including moves on immigration and trade.?

As it relates to the dollar, anticipate consolidation following the previous two week’s spike in volatility. Trends are likely to persist, with slow but steady dollar strengthening most likely for now.?