Dollar Rises on Energy Prices, Central Bank Expectations
The US Dollar (USD) is benefiting from higher energy prices and expectations of further central bank tightening, ING notes. The dollar continues to perform well as high energy prices raise expectations for a central bank response.
ING's Chris Turner points out that since the June FOMC meeting, two-year real USD swap rates have risen 30bp as investors buy into the need to restore credibility when it comes to fighting inflation. This is in line with President of the ECB, Christine Lagarde's statement yesterday that the central bank would be hiking in September, and markets now price a further 75bp of tightening for both the ECB and the Bank of England.
Turner warns it is dangerous to fight this trend and sees US Dollar Index (DXY) potentially breaking above June's 101.80 high. While ING does not expect the Federal Reserve to hike next week, Turner believes that with US President Donald Trump threatening a fresh military onslaught on Iran, investors will hold onto their long dollar balances into the weekend.