The US dollar rebounded late last week and stayed firmer overnight, pushing the Dollar Index back above 102.00 after falling to 101.10 on 4 November following the US mid-term election results. The move unwound the currency’s post-election losses as fresh US labour market evidence pointed to continued strengthening alongside stronger economic activity in recent quarters.
Fed Policy Expectations and Inflation Risks
The data reinforced expectations that the Federal Reserve will continue tightening, with policymakers increasingly attentive to upside inflation risks. At the same time, indications that second-round inflation effects from the labour market remain contained suggested no immediate need to accelerate the pace of rate rises, which helped to limit upward pressure on US yields and the dollar.
Outlook for Inflation and the Dollar
Attention now turns to this week’s US inflation release for signs that higher energy prices are feeding through more broadly, while the dollar’s level relative to short-term yield spreads implies it may require a hawkish surprise to sustain further gains.
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