US Dollar Remains Near 2021 Highs Amidst a Confluence of Bullish Forces

Photo by Sharon McCutcheon

The US Dollar Index (DXY) is holding above 94.00 as of this morning, and there are plenty of reasons to think it is heading higher as we head towards year-end.  For one, growth has slowed as of late, resulting in movement out of equities into less risky assets or safe-haven currencies like the dollar.  The greenback is also getting support from the monetary policy divergence between the ECB and the Fed – with the latter seemingly ready to tighten things up.  Tighter US monetary policy will further exacerbate the yield gap and boost demand for dollars.  The commodity surge, led by soaring energy prices, is also USD-bullish, given most of the trading is done in dollars.

DXY Daily Chart (via Tradingview)

Skyrocketing energy prices combined with severe supply chain disruptions across the globe have many convinced that this inflation is not transitory by any means – which is weighing heavily on growth expectations and driving down demand for risk assets. This week’s earnings data, as well as US CPI and retail sales, could provide a further tailwind for the greenback amidst the dual-threat of higher rates and stagflation.