The US Dollar (USD) is gaining strength against most major currencies, supported by a combination of firm crude oil prices, rising bond yields, and pressure on equities, according to Brown Brothers Harriman’s (BBH) Elias Haddad [1]. The recent US-China summit resulted in only marginal diplomatic progress, with Chinese President Xi Jinping describing the current trade relationship as having shifted from de-escalation to 'constructive strategic stability' [1].
The US macroeconomic backdrop continues to favor a more restrictive Federal Reserve (Fed) policy stance, which is seen as supportive for the USD. Key factors include a stalled disinflationary trend, a stabilizing labor market, and resilient consumer spending [1]. Notably, US real personal consumption expenditure (PCE) has remained robust, accounting for half of the 2% annualized real GDP growth in the first quarter of the year [1].
Looking ahead, the Atlanta Fed GDPNow model has raised its estimate for annualized real GDP growth in the second quarter to 4.0%, up from 3.8% previously, with PCE again expected to contribute nearly half of that expansion (+1.87 percentage points) [1]. The US swaps curve has also adjusted higher in favor of the USD, now pricing in 35 basis points of rate hikes over the next twelve months, compared to 25 basis points earlier in the week [1].
Today's release of US April industrial production data is not expected to significantly impact market expectations for Fed policy, according to BBH [1].
CONCLUSION
The US Dollar is being bolstered by expectations of a more restrictive Fed, resilient consumer spending, and upwardly revised GDP growth forecasts. Market pricing now anticipates more rate hikes in the coming year, reinforcing USD strength. The overall market takeaway is a medium-impact, moderately positive outlook for the US Dollar.