The US dollar index once fell below 101 in mid-April and remained weak for a whole month, then rebounded unexpectedly, reaching a peak of 103.65 at the time of writing. During the period, the Federal Reserve raised interest rates by 0.25% as expected on May 4, and the benchmark interest rate rose to 5.00 - 5.25%. At the same time, it hinted that it would pause interest rate hikes. The post-meeting statement pointed out that economic activities expanded at an appropriate pace in the first quarter, and the trend of employment growth remained strong, but inflation was still high and the risks in this area required great attention. Chairman Powell also mentioned that according to the current outlook on inflation, it is not appropriate to cut interest rates this year. 

Then an unexpectedly strong US employment data was released for April. In addition, many Fed officials have expressed their views one after another, and most of them agree that interest rate hikes can be suspended to observe the impact on the economy and prices after continuous tightening. However, whether the interest rate hike cycle has ended, the attitude is more cautious. The expectation of market on interest rate cuts this year has been gradually weakened, and the US dollar index has also successfully established a bottom around 101. Technical trends have driven the exchange rate to turn around and rebound. 

The previous factors that were negative for the US dollar temporarily lost their effect. In mid-to-early May, the Federal Reserve Bank of New York issued a report stating that the loss of regional bank deposits was mainly concentrated in about 30 super regional banks similar to Silicon Valley Bank. The larger number of small regional banks was not affected much, and the report somewhat eased market concerns about a US banking crisis. 

The other is the issue of the debt ceiling. Negotiations have not made much progress so far. Recently, the Speaker of the House of Representatives McCarthy once stated that it is expected to hold a vote on the debt ceiling increase agreement before the end of May. However, they were unable to reach a consensus with the White House on the issue of spending cuts. As a result, the negotiations came to an impasse, leading to a rise in US bond yields and a fall in US stocks. 

However, investors appeared optimistic that a last-minute deal could be reached. In addition, the economic performance of the United States and other major countries has declined. Relatively speaking, there is still a slight advantage for the United States, at least the job market is very resilient. In terms of monetary policy, it is approaching the end of their interest rate hike cycle in major countries, and the US benchmark interest rate is still the second highest among them (New Zealand just raised interest rates to 5.5%). The most important thing is that there are no new factors in the market to promote market conditions in the near future, and the US dollar has not fallen below the 100 mark. The technical trends have dominated this wave of US dollar rebound.It should be noted that in the latest round of decline of the US dollar index, it fell from close to 106 to around 100.80. There should be some resistance if it rebounds by 61.8% and the target is around 104. In addition, the market risk will be improved if the debt ceiling issue can finally be resolved before the deadline. There will be an impact on the trend of the US dollar. I am still not optimistic about the performance of the US dollar in the second half of the year.

Patrick Law

General Manager of Hantec Group