Strength in Dollar Driven by Hawkish Fed, Safe-Haven Buying

The U.S. Dollar finished higher last week, helped by the predicted outcome of the U.S. mid-term elections and a hawkish U.S. Federal Reserve. Solid U.S. economic data also contributed to the gains. Early in the week, the dollar was pressured after three consecutive weeks of gains as investors took profits before the U.S. mid-term elections on speculation that they may fuel a new bout of volatility for global markets.

For the week, December U.S. Dollar Index futures settled at 96.734, up 0.391 or +0.41%.

Election Worries Fed Early Dollar Weakness

At the start of the week, the signals were mixed for the U.S. Dollar. The longer-term trend is up, but nervousness ahead of Tuesday’s elections and Wednesday’s Fed interest rate decision and monetary policy statement encouraged investors to trim long positions until the uncertainty cleared.

The latest data from the Commodity Futures Trading Commission was also hinting at a bullish tone with speculators adding to their net long U.S. dollar bets, taking the value of the net long dollar position to $26.74 billion in the week-ended October 30, nearing its highest level since December 2016.

Furthermore, the U.S. non-farm payrolls report from November 2 showed jobs growth rebounded sharply in October and wages recorded their largest annual gain in 9-1/2 years, pushing U.S. Treasury yields on ten-year maturities to 3.2 percent.

Fed Decisions Fuel Mid-Week Turnaround

The dollar plunged early Wednesday, impacted by the outcome of the U.S. elections. Since the mid-term elections came in as expected, there was no heightened market volatility so investors holding the dollar as a hedge, decided to liquidate positions. The sell-off was short-lived, however, as investors shifted their focus to the Fed.

The central bank’s Federal Open Market Committee (FOMC) kept interest rates unchanged, while maintaining the hawkish language seen in recent policy statements. The central bank as expected unanimously approved keeping the federal funds rate in a range of 2 percent to 2.25 percent.

The Fed also made a few tweaks to the way policymakers are viewing economic conditions. On the upside, the committee noted that the unemployment rate “has declined” since the September meeting. The Fed also reiterated its belief that “economic activity has been rising at a strong rate.”

On the downside, the Fed’s statement noted that the “growth of business fixed investment has moderated from its rapid pace earlier in the year.” The Fed also reiterated its belief that “economic activity has been rising at a strong rate.”

Hawkish Interest Rate Outlook Drives Dollar Toward 16-Month High

The dollar continued to post solid gains into the close on Friday as it neared a 16-month high. The greenback was underpinned by the Fed’s statement which kept rates steady and reaffirmed its monetary policy tightening stance. The dollar’s rally was further aided by weakness in the Euro.

Ahead of the new week, buyers are likely to continue to support the dollar for two reasons:  the Fed is still hiking rates and trade tensions are still making the greenback an attractive safe haven asset.