The dollar edged higher, maintaining its dominant position in the currency market, with expectations suggesting it will continue to reign until U.S. “economic exceptionalism” begins to wane, potentially allowing the Federal Reserve to outline a clearer path for interest rate cuts.
US Dollar Index Futures saw a 0.15% increase, reaching 105.66.
According to Macquarie’s Wednesday note, “economic exceptionalism” in the United States remains the prevailing theme in foreign exchange markets. This phenomenon has prompted the Federal Reserve to maintain a relatively hawkish stance, especially when compared to other central banks signaling potential rate cuts sooner rather than later.
Macquarie emphasizes that the Federal Reserve’s rhetoric stands in stark contrast to the European Central Bank (ECB), Bank of England (BoE), Bank of Canada (BoC), and Reserve Bank of Australia (RBA). The upcoming release of the Personal Consumption Expenditures (PCE) price index on Friday and U.S. gross domestic product (GDP) data on Thursday will be closely monitored for further insights.
Despite this, Macquarie warns that the dollar may face hurdles after the summer, contingent upon several factors aligning. These include a further deceleration in inflation, slowing growth in the euro area, and a reduction in geopolitical tensions.
While recent economic data from the UK and Eurozone have shown signs of improvement, contributing to rebounds in GBP/USD and EUR/USD, sustained outperformance by other economies will be necessary to challenge confidence in U.S. economic exceptionalism. According to Macquarie, such a shift will require a more prolonged period of robust performance from the rest of the world.