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US Dollar on the March; Markets Yet to Price in Full Extent of Fed Hikes, Says SEB

The US dollar made inroads against most of the world’s currencies on Thursday as trade fears forced investors into safer assets.

Thursday marked the third consecutive day of gains for the dollar; the greenback appreciated on news that President Trump is considering even higher tariffs on $200 billion worth of Chinese goods.

Midweek, the dollar had appreciated both before and after the meeting of the Federal Reserve, at which US interest rates were left unchanged but the US economy talked up.

The Fed said in a statement on Wednesday that “economic activity has been rising at a strong rate,” and investors noted the careful revision from June’s statement, in which the economy was described as growing at a mere “solid rate.”

Approaching the end of Thursday’s New York session, the dollar had strengthened to 1.159 per euro. A little more than forty-eight hours earlier, it had been as weak as 1.175.

Against the British pound, the dollar strengthened to 1.302, much better than the week’s dollar low (GBP/USD high) of 1.318. The pound’s surprising 0.8 percent loss in value following a UK interest rate rise represents a “potentially ominous warning sign for the British currency going forward” according to XTB’s chief market analyst David Cheetham.

Dollar-yen was little changed at levels in the 111.60s.

The greenback has done especially well in recent months against emerging market currencies and in this regard there is no change to note. At 6.845 Chinese yuan, the dollar is now at its strongest level since May 2017; at 4.075 Malaysian ringgit, it’s at its best since December; and against the Turkish lira, the dollar has marched its way to an all-time high of 5.093.

The great news for holders of US currency is that there are yet further grounds for optimism, at least according to senior staff at SEB. Writing on Wednesday, the bank’s chief economist Robert Bergqvist had the following to say on US monetary policy:

“We expect the Fed to raise its policy rate eve­ry quarter over the next twelve months to 3 percent [from current 2 percent]. Our twelve-month-scenario implies a policy path that moves gradually from mo­destly accommodative today to neutral [3 percent] and, after so­me time, probably modestly beyond neutral. We see current market pricing of Fed hikes as too dovish.

If SEB had its way, markets would reflect steeper US interest rates, off which the US dollar would piggyback.

Per SEB’s current aggressive forecasts, the dollar is set to appreciate markedly by the end of September to 1.1 to the euro, to 1.22 to the pound and to 0.72 to the Australian dollar.

Please note that the opinions of our authors are their own and do not reflect the opinion of Best Exchange Rates and should not be taken as a reference to buy or sell any financial product.

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