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US Dollar Index (DXY) rallies above 99.00 amid soaring US yields

  • The US Dollar index hits fresh five-week highs above $99.00.
  • A resilient US economy and rising price pressures have boosted bets of Fed rate hikes.
  • Investors keep an eye on the developments of the Trump-Xi meeting in Beijing.

The US Dollar (USD) is outperforming this week, fuelled by higher US Treasury yields as solid macroeconomic data and high inflationary pressures have boosted expectations of Federal Reserve (Fed) rate hikes later in the year.

The US Dollar Index (DXY), which measures the value of the Dollar against a basket of peers, is trading at five-week highs, at 99.20, at the time of writing, on track for its best weekly performance in two months, after rallying about 1.30% in the last five days.

US Retail Sales data released on Thursday revealed that consumption remained resilient in April, and weekly Initial Jobless Claims provided further signals of a stabilising labour market, despite the war in the Middle East.

Consumer and producer inflation data released earlier in the week, on the other hand, have shown that the impact of the energy shock has been stronger than expected. These figures have prompted markets to raise bets of Fed interest rate hikes by the end of the year, which have propelled US Treasury yields to one-year highs and are buoying speculative demand on the Greenback.

In the meantime, the US-Iran war remains stalled, with the Strait of Hormuz still closed and Oil prices around $100 aper barrel, threatening to derail global growth. US President Donald Trump affirmed that he is losing patience with Iran, following talks with Chinese President Xi Jinping in Beijing, where he is looking for some support to resolve the Middle East crisis, apart from further trade facilities to US businesses.

Interest rates FAQs

Interest rates are charged by financial institutions on loans to borrowers and are paid as interest to savers and depositors. They are influenced by base lending rates, which are set by central banks in response to changes in the economy. Central banks normally have a mandate to ensure price stability, which in most cases means targeting a core inflation rate of around 2%. If inflation falls below target the central bank may cut base lending rates, with a view to stimulating lending and boosting the economy. If inflation rises substantially above 2% it normally results in the central bank raising base lending rates in an attempt to lower inflation.

Higher interest rates generally help strengthen a country’s currency as they make it a more attractive place for global investors to park their money.

Higher interest rates overall weigh on the price of Gold because they increase the opportunity cost of holding Gold instead of investing in an interest-bearing asset or placing cash in the bank. If interest rates are high that usually pushes up the price of the US Dollar (USD), and since Gold is priced in Dollars, this has the effect of lowering the price of Gold.

The Fed funds rate is the overnight rate at which US banks lend to each other. It is the oft-quoted headline rate set by the Federal Reserve at its FOMC meetings. It is set as a range, for example 4.75%-5.00%, though the upper limit (in that case 5.00%) is the quoted figure. Market expectations for future Fed funds rate are tracked by the CME FedWatch tool, which shapes how many financial markets behave in anticipation of future Federal Reserve monetary policy decisions.

Author

Guillermo Alcala

Graduated in Communication Sciences at the Universidad del Pais Vasco and Universiteit van Amsterdam, Guillermo has been working as financial news editor and copywriter in diverse Forex-related firms, like FXStreet and Kantox.

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