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The U.S. dollar advanced to multi-week highs as investors pared back expectations for Federal Reserve rate cuts following a run of stronger-than-expected US data.
The currency is this week's top performer, and all indications show that the primary driver behind the move is a reappraisal of how many times the Federal Reserve will cut interest rates in the coming months.
"A string of upbeat economic indicators has cast doubt on the need for aggressive easing by the Fed, backing the cautious stance of the majority of FOMC officials," says Raffi Boyadjian, Lead Market Analyst at Trading Point.
Revised GDP figures showed the U.S. economy expanded by 3.8% in the second quarter, a stronger outcome than forecast and fuelled by robust household consumption.
Durable goods orders for August also exceeded expectations, while jobless claims fell in the week ending September 20, easing fears about a softening labour market.
Boyadjian says, "U.S. Treasury yields edged higher after the solid US data releases, pushing the US dollar to more than three-week highs against a basket of currencies."
EUR/USD fell below 1.17 and GBP/USD dropped to seven-week lows under 1.34.
Futures markets now price just under 40 basis points of easing at the Fed’s two remaining meetings this year, compared with 50 basis points immediately after September's policy decision.
On Tuesday, Fed Chair Jerome Powell said that "uncertainty around the path of inflation remains high."
At last week's Federal Reserve interest rate cut, he said further reductions were dependent on the data, showing he is not willing to verify the market's current assumption that a generous flow of rate cuts is in the offing.
This week, other members of the Fed's board concurred, suggesting there was no easy route to a run of back-to-back rate cuts.
"Although the slew of Fed speakers this week has highlighted the growing divisions at the central bank about the state of the labour market, the data firmly support the views of the more hawkish members, and this is very dollar positive at the moment," says Boyadjian.
The latest move builds on a broader rally described in recent analysis of sterling, which has fallen to a three-week low against the dollar as UK rate expectations were re-priced lower amid weak growth signals.
In that context, the pound has struggled to hold gains against a strengthening dollar, underscoring the impact of diverging economic outlooks between the US and UK.
Elsewhere, Brent Donnelly, strategist at Spectra Markets, says month-end flows could be behind the move.
"The dollar demand is showing up on schedule as we near the end of the month. Corporates (USD buyers) tend to be time-sensitive and price-insensitive while central banks and hedgers (USD sellers) are currently patient and level-dependent. This has led to a very short-term mismatch of supply and demand," he explains.
At the end of the month investors shift billions worth of currencies to balance the currency exposure on their portfolios. It's a real thing, but timing, scale and other factors make it quite tricky to identify.
"The U.S. dollar spared no one," says a market briefing from KBC Bank. "Backed by some UST underperformance, the greenback rallied against all of its major peers," says Edward Bell, analyst at Emirates DNB.