The US Dollar has strengthened, supported by rising crude oil prices and expectations for further interest rate hikes by the Federal Reserve, according to Brown Brothers Harriman’s (BBH) Elias Haddad [1]. The renewed increase in oil prices is exerting downward pressure on stocks and bonds, while underpinning a firmer USD. Persistently high energy prices are keeping risks to inflation, policy rates, and benchmark bond yields skewed to the upside, which favors the currencies of energy exporters and the US Dollar over those of energy importers [1].
The minutes from the September 15-16 FOMC meeting indicated that most participants believe another increase in the federal funds rate target range would likely be appropriate by year-end. Fed funds futures have already fully priced in a 25 basis point hike to a range of 4.00–4.25% on December 9 [1]. The minutes also highlighted that US financial conditions remain supportive of economic growth, with equity prices having risen substantially this year and corporate bond spreads remaining narrow, giving the Fed room to continue tightening policy [1].
US growth outperformance and strong foreign appetite for US securities are also contributing to the Dollar’s strength relative to other currencies [1]. The combination of these factors suggests ongoing support for the USD in the near term.
CONCLUSION
Rising oil prices and expectations for a Fed rate hike are reinforcing US Dollar strength, while pressuring stocks and bonds. With financial conditions still supportive of growth, the Fed appears to have room for further tightening, keeping the USD well-supported in the current environment.