The current elevated interest rates have been weighing on consumers’ minds for some time now. From slashing household budgets to postponing purchases of their dream first houses, consumers have been adopting a wait-and-watch approach for months. The U.S. Fed has also been closely monitoring macroeconomic data, awaiting signs that inflation is nearing its 2% target. The U.S. dollar, in the meantime, is displaying strength and possibly gearing up for its next act in H2 2024.
Fed’s Status Quo and the Yen’s Pain
The U.S. central bank maintained its higher-for-longer interest rate stance this week. However, Fed Chair Jerome Powell indicated that a rate cut was still a possibility (though the timing remains uncertain). This status quo has kept the U.S. Dollar Index (DXY) largely unchanged over the past five sessions.
While the DXY has encountered strong resistance at the 106.4 level recently, it is still hovering at its highest level in nearly six months. In fact, the strength of the U.S. dollar prompted the Bank of Japan to intervene to stem a free fall in the Japanese Yen (FX:USD-JPY) this week. According to Bloomberg, the BOJ spent about $23 billion to shore up the Yen in its second currency intervention in a week. Although the BOJ is likely to defend the Yen at the 160 levels, the currency is still at its lowest level against the dollar in over three decades.
Tighter Rates in Emerging Markets
The dollar’s continued strength could also change the narrative among the world’s emerging markets. Until some time back, easing rates in multiple markets seemed like the most likely scenario in H2 2024. However, the Fed’s delayed stance on rate easing may force a tighter interest rate scenario in major economies including India, Mexico, Indonesia, and South Africa. According to Bloomberg, the U.S. Dollar has gained against 31 of the 32 widely followed emerging market currencies over the past three weeks.
Is USD Expected to Rise or Fall?
This strength could potentially propel the DXY to highs last seen in October.
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