The U.S. Dollar Index (DXY) is up by over 1.5% to around 106 over the past month, and it looks like it could retest October 2023 highs over the coming weeks.
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Not the Time to Overlook Inflation
The U.S. dollar is edging higher today as traders digest the first U.S. presidential debate. Former President Donald Trump scored some winning points in the debate, and traders are already beginning to price in the potentially inflation-boosting impact of Trump’s plans to impose duties on imports. The former U.S. President wants to impose 60% tariffs on Chinese imports and 10% duties on imports from the rest of the world.
Such a scenario could mean higher prices for American households on a range of products, from food to automotives. While this outcome hinges on the November 2024 election, another inflation-boosting domino is already in motion.
The current crisis in the Red Sea threatens to impact consumers’ wallets for months to come. The Houthi attacks in the Red Sea have prompted shipping companies to opt for longer voyages via the Cape of Good Hope. This has resulted in longer voyages, higher costs for shipping companies, capacity shortages, and congestion at ports. The dynamic is resulting in elevated freight rate levels, which threaten to feed back into inflation. Importantly, shipping company A.P. Moller – Maersk (OTC:AMKBY) (GB:0O77) (DE:DP4A) sees these challenges persisting over the remainder of 2024. According to Bloomberg, the Red Sea tensions have lowered container-line transits via the Suez Canal by nearly 80%.
Fed Talk…
This trend could potentially prolong the U.S. Fed’s fight against inflation. Earlier this week, Fed Governor Michelle Bowman noted that interest rates could stay elevated for quite some time as upside risks to inflation continue. Notably, Bowman does not anticipate any rate cuts this year.
What Is the Outlook for the Dollar Index?
The confluence of these factors means the DXY could be steadily heading higher over the coming months as markets brace for election uncertainties in France, the U.K., and the U.S. Meanwhile, the U.S. PCE inflation numbers today are a key metric to keep an eye on. A strong PCE reading could provide another boost for the DXY.
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