USD may finally be finding renewed yield support - Westpac

The US dollar rose against all G10 currencies last week, albeit not dramatically and using the Bloomberg Dollar Index (the dollar’s value against a basket of major currencies), the greenback has risen in 3 of the past 4 weeks, after falling for 7 straight weeks either side of year-end, notes Sean Callow, Research Analyst at Westpac.

Key Quotes

“Perhaps the tide is turning for the US dollar, in the direction of Westpac’s base case for 2018 – that the Fed’s ongoing path of higher short term interest rates will benefit USD in the months to come.”

“The calendar in the week ahead doesn’t look to be pivotal for FX markets but there are still some events and data worth noting. In the US, the highlights should be the first semi-annual testimony to Congress by new Fed chairman Jerome “Jay” Powell, starting with a House committee on Tuesday. At the moment interest rate markets price between 2 and 3 Fed rate hikes this year (closer to 3), while Fed officials such as San Francisco’s John Williams suggest 3 to 4 hikes. Powell might shed some light on this debate.”

“On the US data front, the focus should be the Jan reading on the Fed’s preferred inflation measure, the PCE deflator (price index of personal consumption expenditure). The core measure is expected to remain at 1.5%yr. It has been below the Fed’s 2% target since 2012.”