Dollar Needs Data Staircase to Deliver Another Broad Advance

The US dollar has shown signs of improvement, but it still needs more than just policy rhetoric to justify a broader advance. The Federal Reserve's recent hike removed some doubt about its willingness to tighten monetary policy when inflation demands it.

This combination is crucial because one of the negative factors for the dollar this summer was the concern that policy might eventually become constrained, just as inflation needed more discipline. However, the latest hike has dragged the dollar away from the bottom of its range.

The question now is whether the data will validate the tightening already priced into the curve. If growth starts losing momentum or inflation looks tamer, traders can take some of those future hikes back out without the Fed formally turning dovish.

The market has already rebuilt a respectable amount of tightening into the curve, so another hawkish sentence doesn't carry the same currency punch unless the numbers arriving behind it keep the story alive. China's policy signal is also worth noting, as a firmer renminbi acts as a quiet brake on broad dollar upside.