Favorable Interest Rate Differential Supporting Surge in U.S. Dollar

September U.S. Dollar Index futures surged on Friday, putting it in a position to post a solid gain for the fifth straight week on increased expectations for a U.S. Federal Reserve interest rate hike as other central banks prepared for further rate cuts and additional stimulus.

A widening interest rate differential between the U.S. and other major currencies has buoyed the dollar in recent weeks as it continued to grind higher amid global uncertainty following the U.K.’s surprise decision to exit the European Union.

On Friday, the US Dollar Index rallied to 97.55, up 0.504 or 0.52%, to its highest level since March 10. Additionally, chart watchers and technical analysts noted its climb above a major Fibonacci level that had previously served as resistance. The trade through this level suggests momentum is building for further upside action next week.

Most traders are pointing out the overall divergence in the policies of the U.S. Fed and the other major central banks, particularly the Bank of Japan and the Bank of England as the primary catalyst underpinning the dollar against a basket of currencies. Additionally, actions by key central banks in Australia and New Zealand also added to the Greenback’s overall strength.

The GBP/USD reversed course on Friday following the release of surveys that suggested the British economy may start to contract after last month’s Brexit vote. The flash, or preliminary, Markit survey of purchasing managers fell by the most in its 20-year history, prompting British officials to say more easing could be imminent. Manufacturing PMI was 49.1, down from 52.1, but better than the 47.8 estimate. Services PMI came in at 47.4, down from 48.9. It also missed the 52.3 estimate.

The stronger U.S. Dollar also drove December Comex Gold prices lower on Friday. The market was last at $1328.60, down $10.3 or 0.77%. Once again investors struggled with the easing of interest rates and the prospect of additional stimulus against the backdrop of a possible interest rate hike by the U.S. Federal Reserve.

September crude oil prices were down on Friday as potentially higher Iraqi crude exports and bearish U.S. inventory data weighed on the market. Traders are primarily concerned with huge glut of petroleum products, namely gasoline and distillates. Also on Friday, the number of rigs operating in the United States rose for a fourth consecutive week, increasing by 14 to a total of 371 rigs, oilfield services firm Baker Hughes reported.