The Unstoppable U.S. Dollar Rally


The relentless rally of the U.S. dollar is causing more trouble for stocks. Last Friday, the dollar recorded its 12th consecutive week in the green, marking its longest winning streak since October 2014. In fact, the ICE U.S. Dollar Index (DXY) reached a high of 107.35 on Tuesday, the strongest level since November 22, according to FactSet data.

This index measures the dollar’s strength against a basket of currencies, including the Japanese yen, euro, and British pound. However, its heaviest weighting is towards the euro, which has recently dropped below $1.05 – its lowest level since December.

Interestingly, the Japanese yen also experienced a brief decline, with the dollar trading at less than 150 yen for the first time since October 21, 2022. However, traders speculate that the Bank of Japan may step in to support the yen, as it considers this level to be critical.

It is worth noting that rising Treasury yields and expectations of higher interest rates from the Federal Reserve have contributed to the dollar’s ascent since July. This reversal follows a slump in the first half of the year.

In 2023, bond markets have continued to suffer as Treasury yields reached their highest levels in 16 years on Tuesday. This increase in yields has further propelled the dollar. Market participants are particularly focused on the yield of the 30-year Treasury bond, which recently rose 12.4 basis points to 4.899% – its highest level since late 2007.

The strong performance of the U.S. dollar contrasts with last year when it embarked on a historic rally that peaked in late September. During this time, U.S. stocks experienced their worst calendar-year performance since 2008, and global bond markets faced significant losses.

The current situation suggests that the U.S. dollar’s rally shows no signs of slowing down, creating both opportunities and challenges for various market participants.

Job Openings and Chaotic Trading: A Closer Look

Amidst the recent chaotic trading environment, analysts are pointing to the so-called JOLTS data as a significant contributing factor. JOLTS data provides insights into the number of job openings in the U.S. labor market and has occasionally instigated selling in stocks and other unexpected market fluctuations throughout the year.

The most recent data, released on Tuesday, indicates a resurgence in job openings for August, with a notable increase to 9.6 million from the previous month’s revised figure of 8.9 million. This surge highlights a strong demand for labor within the steadily growing U.S. economy.

Investors have interpreted these figures as an indication that the Federal Reserve is more likely to prolong its plan of maintaining interest rates above 5%, a sentiment supported by the latest release of officials’ interest-rate projections, known as the Fed “dot plot.”

In response, treasury yields and the U.S. dollar experienced an upward climb, while another intense sell-off in stocks ensued. The S&P 500, according to FactSet, saw a decline of 1.4% in recent trade, reaching its lowest level since June 1.

Furthermore, these data have also increased the probability of a Fed interest rate hike at least once before the conclusion of 2023, aligning with officials’ September projections.

Gina Bolvin, president of Bolvin Wealth Management Group, remarked that today’s hotter-than-expected job opening data is unfavorable news for stocks and bonds. The market is eager to witness a decrease in this number, but now the odds of a rate hike have heightened.

Over the next few days, traders will carefully analyze various U.S. labor-market data, with particular attention on Friday’s monthly nonfarm payrolls report – a highly anticipated event for the week. Analysts suggest that any signs of the labor market slowing down could lead to a decrease in yields and the dollar, while an unexpectedly robust report would likely have the opposite effect.

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