Hawkish Fed Speakers Drive U.S. Dollar Higher

The U.S. Dollar was in focus last week after it recovered from a bearish outlook to post a solid gain for the week.  Against a basket of currencies, the June U.S. Dollar Index closed at 100.218, up 0.776 or +0.78%.

The week started with the dollar sliding to a four-month low against a basket of currencies as investors weighed the prospects of a U.S. fiscal spending boost under President Donald Trump after his failure to push through a key healthcare reform bill the week before.

President Trump’s inability to deliver a major election campaign pledge drove the June U.S. Dollar Index to 98.67, its lowest level since November 11, or a few days after Trump’s surprising election. Aggressive sellers said the dollar was under pressure because the inability to pass healthcare reform was a big setback for the Republican president whose own party controls Congress. Furthermore, it raised doubts over whether he will be able to deliver his tax reforms and increased fiscal spending.

The dollar reached its low for the week on Monday after a top U.S. Federal Reserve official reinforced expectations of more U.S. rate hikes in the future while political uncertainties surrounding Britain’s exit from the European Union pressured European currencies.

In an interview with CNBC, Federal Reserve Vice Chairman Stanley Fischer said two more increases of U.S. overnight rates this year seemed “about right”.

Dallas Federal Reserve Bank President Robert Kaplan and Chicago Fed chief Charles Evans also put the emphasis back on the prospect of more increases in U.S. interest rates.

Kaplan, who said he sees inflation and employment approaching the Fed’s goals, continued to advocate a gradual pace of rate increases to avoid shocking the economy. “You don’t want to just slam on the brakes. You want to ease off the accelerator first,” he said. At the same time, “monetary policy does operate with a lag,” so it makes sense to lift rates before inflation hits the Fed’s 2 percent goal.

Evans said two interest-rate increases may be the right amount of tightening for the U.S. economy this year given uncertainty surrounding the outlook for inflation and government spending.

“To the extent that I gain more confidence in the forecast I have, that would be a good indicator that I could perhaps support three,” Evans said on March 27. “Two might be the right number if there’s a little bit more uncertainty.”

There were no major reports in Australia, New Zealand and Japan so these currencies were manipulated by rising U.S. Treasury rates and the hawkish talk from the Fed officials. They combined to make the U.S. Dollar a more attractive investment last week.