Dollar Advances on Hawkish Fed Talk

CURRENCY FUTURES

The U.S. dollar index advanced to its highest level since early March.

Recent strength in the greenback is due on-again hawkish comments from Federal Reserve officials and disappointing economic data in Asia and Europe.

Interest rate differential expectations remain favorable for the greenback, especially against the European currencies, since the U.S. economy appears to be holding up relatively well compared to economies in Europe.

Longer term, higher prices are likely for the U.S. dollar and lower prices are likely for all the other major currencies.

The euro area gross domestic product expanded only 0.1% on quarter in the three months to June, which was revised lower from an initial estimate of a 0.3% gain.

Industrial production in Germany shrank 0.8% month-over-month in July 2023, which is worse than the market consensus of a 0.5% decline and following a downwardly revised 1.4% fall in June.

The U.K. Halifax House Price Index fell 4.6% year-on-year in August 2023, following a revised 2.5% drop in July and compared with the market consensus of down 3.45%. This was the largest decrease in house prices since August 2009.

Australia’s trade surplus declined in July 2023 and was the smallest trade surplus since February 2022, as exports shrank and imports increased.

STOCK INDEX FUTURES

Stock index futures are lower due to renewed hawkish comments from Federal Reserve officials.

Yesterday Boston Federal Reserve President Susan Collins said she needs more evidence to convince her that inflation has been tamed, and more increases in interest rates could be needed depending on upcoming data.

Jobless claims in the week ended September 2 were 216,000 when 238,000 were expected.

Annualized nonfarm productivity in the second quarter increased 3.5% when up 3.6% was anticipated and annualized unit labor costs were up 2.2% when a gain of 1.7% was predicted.

INTEREST RATE MARKET FUTURES

Futures are mixed.

Federal Reserve speakers today are John Williams at 2:30, Raphael Bostic at 2:45 and Raphael Bostic again at 7:00.

It is likely that comments from Federal Reserve officials will be hawkish on balance.

Financial futures markets are predicting there is a 91% probability that the Federal Open Market Committee will keep its fed funds rate unchanged at its September 20 policy meeting, and there is a 9% probability of a 25 basis point increase.

However, there is an increasing possibility, now at 51%, that the FOMC will hike its fed funds rate by 25 basis points at its November 1 policy meeting.

 

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