US: Dollar index moving closer to cyclical high - MUFG

Lee Hardman, Currency Analyst at MUFG, notes that the US dollar has continued to strengthen in the Asian trading session lifting the dollar index to within touching distance of the cyclical high from December of last year at 100.51.

Key Quotes

“It is increasing the risk that US dollar strength will accelerate further heading into year end. The US dollar’s favourable reaction to the election of Donald Trump as President highlights that the market is initially placing greater importance on the potential impact of his more positive policy plans including a significant loosening of fiscal policy and lighter regulation. While currently placing less importance on his more negative policy plans which favour greater trade protectionism and limiting immigration. We have been mainly been surprised by just how well the financial markets have taken in their stride the heightened political uncertainty related to the election of President Trump, which has provided a more solid foundation for the US dollar to extend its recent rebound.”

“It has reinforced the confidence amongst financial market participants that the Fed will follow through with plans to resume rates hikes next month which is currently judged as almost a done deal. We are a little more cautious over the likelihood of a December rate hike believing that the heightened political uncertainty and the sharp jump in US yields following the election could prompt the Fed to be more wary about resuming rate hikes in the near-term. Nonetheless it would be a surprise for the Fed to delay resuming rate hikes beyond next month without a negative shock. Fed Chair Yellen will have the opportunity in the week ahead to provide further guidance over the likelihood of a rate hike next month when she testifies before Congress.”

“The latest IMM report revealed that long US dollar positions have been rebuilt over the past month but they still remain around half the levels recorded during last year amongst asset managers and leveraged funds. It still leaves scope for the US dollar rally to extend further in the near-term if the market continues to focus on the more positive parts of President Trump’s plans.”

“However, we would caution that the unpredictably of President Trump could quickly see the market’s policy focus switch to more negative parts of his plans resulting in a more volatile US dollar in the year ahead. If the US dollar continues to strengthen further undermining the external competitiveness of the US it will increase pressure on President Trump to place greater emphasis on more protectionist trade policies.”