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What's driving the US Dollar surge?

When we came back to our desks this morning and noticed the US Dollar continues to hold near one-year highs, we were slightly taken aback. The first port of call is to acknowledge that US economic drivers are largely unchanged over the past few weeks; the recovery is in progress but by no means is the economy running hot.

Starting top-down with central bank policy, we can conclude that the Federal Reserve is inching towards a taper of its asset purchase program, with some hints at rate hikes next year if economic growth continues its trajectory. Looking bottom-up, we see another factor that might be affecting this behaviour: oil is hovering at seven-year highs, and natural gas is at a 13-year high.

As we’ve discussed in past weeks, supply-side inflation in commodity prices isn’t a sign of economic activity that needs to be addressed by monetary policy, but rather a tax on business and consumers which slows the economy. The real question then, is what attributes make an economy more attractive on a relative basis when energy prices are high? The answer is that net exporters of energy thrive in this environment, while net importers suffer. The US lost some of its productive capacity during the 2015-2016 doldrums but remains mostly self-sufficient. In contrast, the UK is a large net importer of energy which is why UK household heating prices are sky-rocketing.

For reference:

Source: Bloomberg 

Bottom line: Obviously, there’s an inconsistency here; Sterling and the Greenback are both quite strong despite the differing energy footprints. Perhaps we might suggest the market is accepting the Bank of England’s view for the moment—both the BoE and the Fed are working towards tighter policy—without appreciating how their relative energy policy positions enable or restrain economic growth. In the case of the UK, it’s like a flat-earther (non-science believer) using an iPhone (technology built on science), not appreciating the irony of that inconsistent position.

The week ahead


On a trade-weighted basis, the Pound had its best performing week since August, closing 0.5% higher as financial markets brought forward bets of an interest rate hike from the Bank of England. The move lifted Cable to highs of 1.3657 after falling over 2.0% in the previous week, while GBP/EUR edged nearer to the 1.18 handle. While economic headwinds such as the UK’s energy crisis and labour shortages persist, policymakers were vocal over the weekend about upcoming rate hikes. These hikes will tackle spiralling inflation, which Governor Andrew Bailey claimed could be ‘very damaging’ unless action is taken.

  • Tuesday’s Unemployment Rate release for August is expected to read 4.5%, down from 4.6% in July. Meanwhile, the Average Earnings Index is forecast to rise to 8.4% from 8.3% previously.
  • On Wednesday, it’s predicted that Industrial Production for August will signal slowing growth at 0.2%, down from 1.2% in July. Manufacturing Production is expected to remain stagnant at 0.0% growth.



The Euro continued to drift lower against its peers last week, reaching its lowest level since July 2020 on a trade-weighted basis as economic data releases continued to fall short of market expectations. The common currency touched lows of 1.1529 against the US Dollar on Wednesday and failed to gain much ground after US Non-Farm Payrolls missed expectations. While most major central banks are discussing withdrawing monetary stimulus, European Central Bank President Christine Lagarde suggested fresh measures could be introduced next year after the current emergency bond-buying program ends in March 2022.

  • On Tuesday, German ZEW Economic Sentiment surveys are forecasting a reduction in both expectations and current sentiment figures. These are set to print at 23.5 and 28.0, respectively.
  • Wednesday’s German Consumer Price Index for September is expected to read 0.0% for the month and 4.1% year-on-year, up from 3.9% year-on-year in August.



The Greenback continued to strengthen against its peers last week as Treasury yields climbed, marking its fifth consecutive week of gains on a trade-weighted basis. On Thursday, the US Senate agreed to temporarily increase the government’s debt ceiling until the 3rd of December, calming financial markets in the process. The increase still needs a vote in the House and is expected to be passed on Tuesday. The US Dollar opens the week close to its index’s 100-daily moving average, which could provide resistance against further gains in upcoming sessions.  

  • Wednesday’s CPI reading for September is expected to show 0.3% growth in prices for the month and 5.3% growth year-on-year, both unchanged from August’s readings.
  • Thursday’s Initial Jobless Claims is forecasting 320k Americans claimed unemployment last week, slightly down from 326k in the week prior.
  • Friday’s Retail Sales for September is expected to read -0.2%, down from 0.7% in August, while October’s Empire State Manufacturing Index reading is predicted to come in at 25.0 in a fall from September’s 34.3 figure.


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