The dollar has continued to show strong gains in currency markets as traders continue to sell off bonds and switch to dollar back assets. Yields in many bonds have hit their high list levels in over six months.
The current sell-off in the bond market comes as a result of increased expectations of an interest rise before the end of the year. Over the past week over $1.29tn was lost in the value of bonds as investors have flocked to dollar backed assets.
Consensus expectations for an increase in US interest rates when the Fed next meets in December now run at 80%.
Current rise expectations have increased significantly since election night. At this time markets were pricing in only around a 50% chance of a rise. However it seems that early comments from the Trump administration have fueled the latest round of dollar buying.
The new administration is known to be keen to increase spending. Trump has also expressed a desire to cut taxes. This is likely to fuel growth, particularly given that the latest batch of employment figures which also look good for the economy. The upshot is that the economy is likely to see increased levels of inflation over the coming months. This in turn should make an early rise in rates more likely.
What markets don’t know yet are exact the details of the expected policy measures. It will take several months for these to be formulated and formally announced. One swerve ball is that they could fall short of current expectations. Nevertheless investors now believe there is now a 58% chance that the Fed will increase rates twice before the end of next year. If the expected policy measures materialise the latest rally is somewhat understandable.
The last round of dollar strength has seen the greenback rise strongly. It has risen both against emerging markets currencies in addition to other major currencies.
The pair has gained over 300 against the EURO since the results of the election were announced. It has also notched up strong gains against the Japanese Yen. The pair now sits above 108.00 from the spike lower of 101.15 posted during the election results.
Outlook
The current dollar train shows no sign of slowing down. The buck has continued to outperform into the start of the new week.
The US Dollar Index is coming up against potentially strong resistance at the 100 level. This may prove to be a point where it consolidates at least temporarily. However strong support is expected at 98.50 and below at 97.50.
Traders with a binary options broker that offers contracts on the USD Index could potentially use any pullback to the 99.00 level to position for a move higher. This may present an entry for traders who anticipate for a a run at the psychologically important 100 level.
Provided that the US economy can continue to convince markets that it is back on a strong growth track further gains look set to continue.