The US Dollar has continued to climb against almost all major currencies in the past two trading sessions and in trade-weighted terms is at its strongest point since mid-March 2017. Strong US macro data are supporting market expectations that the differential between the Federal Reserve’s policy rates and other developed central banks’ policy rate will widen further near-term which is in turn fuelling the Dollar. At the same time many developed market currencies, including Sterling and the Australian and Kiwi Dollars, and emerging market currencies (including the Turkish Lira and South African Rand) are struggling.
The US ISM manufacturing PMI index jumped to a much higher-than-expected 61.3 in August – the strongest print since February 2011 – from 58.1 in July. Based on precedent, this points to still robust US industrial output growth (which hit a six year high of 4.2% year-on-year in July) and more generally strong US GDP growth in Q3. This is in turn supporting market pricing that the Fed will hike its policy rate 25bp to 2.00-2.25% at its meeting on 26thSeptember despite the more cautious tone espoused by FOMC members Bullard and Kashkari in the past 24 hours.
Other developed central banks are unlikely to hike their policy rates any time soon, bar the Bank of Canada which is expected to keep its policy rate on hold today but hike rates 25bp to 1.75% at its 14th October meeting. The Swedish Riksbank has also indicated that it may hike rates before end-year.
