The dollar index is on track for its best month since June, and the euro is caught in the squeeze. A hawkish Fed, a Treasury bond rout and safe-haven demand are lifting the greenback, while Franklin Templeton's David Zahn says euro-area growth is set to slow and the ECB may eventually reverse some of its rate hikes.
The U.S. dollar index rose 0.1% to 101.47 on Wednesday, taking its September gain to 2.1% against a basket of six major peers. That puts the greenback on course for its best month since June, squeezing EUR/USD as the pair trades on the wrong side of a broad dollar advance.
Fed hike and bond rout drive the dollar higher
The rally follows the Federal Reserve's first interest rate hike in over three years, which came earlier this month alongside signals of further tightening ahead. At the same time, a rout in the U.S. bond market has pushed Treasury yields to multi-decade highs, and oil prices have climbed on a widening Middle East conflict, adding safe-haven demand for the dollar.
Wednesday's economic data cut the other way. The headline PCE price index rose 0.3% month-on-month and 3.4% year-on-year in August, below the 0.4% and 3.7% economists had expected. The core PCE reading came in at 0.2% month-on-month and 3% year-on-year, also under the 0.3% and 3.3% consensus. Separately, the Bureau of Economic Analysis revised second-quarter GDP growth up to 2.2% from 1.5%.
Odds of another hike slide
The softer inflation prints trimmed bets on an October move. The CME FedWatch tool put the odds of a quarter-point hike next month at about 37%, down from nearly 51% the previous day. New York Fed President John Williams added to that shift on Tuesday, saying there was "no need for urgency" on further rate hikes.
Diverging growth paths pressure the euro
Across the Atlantic, the outlook is turning less supportive for the single currency. David Zahn, head of European fixed income at Franklin Templeton, says European growth has held up better than expected but is likely to lose momentum early next year as higher gas prices and interest rates weigh on activity. He believes markets have priced in too many rate hikes across Europe and the UK, and that the European Central Bank may eventually want to take back some of its earlier increases.
Zahn is overweight Germany and Spain, which he views as the region's most stable markets, and underweight France and Italy because of political noise and Italy's election next year. A slowing eurozone alongside a Fed still guarding against inflation leaves EUR/USD navigating two central banks pulling in different directions.
Sources: Investing.com, investingLive
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