USD: Dollar rises slightly as robust US data and Fed expectations support gains – ING

US Dollar Gains Momentum Amid Strong Economic Indicators

This week, the US Dollar (USD) has been on an upward trend, buoyed by robust economic reports and a modest increase in the Federal Reserve's projected peak interest rate. As a result, the Dollar Index (DXY) is steadily nearing the 100 mark, according to Chris Turner, an FX analyst at ING.

Continued USD Strength Unless Interest Rates Decline

Turner observes that the dollar's recent rise is largely driven by macroeconomic factors. Recent US data, such as solid retail sales and jobless claims, have exceeded expectations. Additionally, the Fed's Beige Book indicated steady economic growth and no immediate risks to employment. These developments have led investors to adjust their expectations for the Fed's terminal rate, raising it by about 5 basis points this week—a notable shift of 32 basis points from last October's lows. Consequently, the DXY is climbing, albeit in a low-volatility environment.

On a relatively calm Friday, attention turned to the latest US Treasury TIC data for November, released last night. The key takeaway is that international investors are still channeling significant funds into US financial markets. While the TIC data can be volatile, the rolling 12-month average shows that net foreign purchases of US assets reached roughly $100 billion per month in November, a sharp increase from about $25 billion during the summer of 2024. Notably, there was a substantial influx into equities, with private sector investors allocating around 45% of their large inflows to stocks. Even official foreign institutions acquired $23 billion in equities. Although the BRICS nations continue to reduce their holdings of US Treasuries, these outflows are being overshadowed by strong private sector investment.

In summary, the process of moving away from the dollar is likely to be gradual. Any significant decline in the dollar's value this year would probably be triggered by lower US interest rates and increased foreign hedging of US assets. A potential risk to the dollar in the coming weeks could arise from substantial interventions aimed at selling USD/JPY and USD/KRW near the 160 and 1500 levels, respectively. The US Treasury appears to be supportive of such measures. If the DXY remains above the 99.45/50 range, it may continue its steady climb toward 100.