US Dollar Index to hit new year highs above 93.45 – Westpac

The US Dollar Index (DXY) continues to trade with a more assured tone, a trend that has been in place since the Fed’s hawkish pivot mid-June. In the view of economists at Westpac, DXY could test 93.5 range highs in the third quarter.

Fed closer to its inflation objectives than the ECB

“The puzzling fall in US yields complicates the more constructive USD story, but it’s mostly a curve flattening story and a recalibration of inflation expectations in the wake of the Fed’s hawkish pivot.” 

“The Fed’s pivot makes for a notable contrast with the ECB, the latter’s strategy review likely to see the Bank adopt a more symmetrical approach to inflation and a less proactive policy process.” 

“Payrolls prints around 500-850K in coming months likely meet the Fed’s test for ‘substantial progress’, opening the door to a taper signal at the August 28 Jackson Hole Fed symposium.” 

“DXY could well be testing fresh 2021 highs beyond 93.45 as taper talk rises to a crescendo in Q3, though it would likely take a clear signal from Chair Powell that tapering discussions are moving forward to open the door to a more sustained DXY lift.”