Dollar Up for 11 Weeks Straight! Has it Peaked?

As the Fed wound down its rate-hiking agenda this quarter, the US dollar (DXY) has been on an extended growth streak of over 6% since mid-July. Now that the risk of a shutdown has been avoided, is it downhill for the rest of the year?

Everything That Goes Up…

The dollar posted its eleventh consecutive weekly gain on Friday despite closing lower on the day after seven green sessions, as the US entered the weekend without even an inkling that a deal to avert a shutdown was in the cards. Although the potential market impact of a shutdown was seen as minimal, it was understandable to expect some of the risk aversion to support the greenback, which has been riding high as yields have drifted higher over the last few months. That has contributed to the dollar capping off its best quarter in a year.

Now that a deal has been reached to avert a government shutdown that might have delayed the publication of key economic data, such as NFP later this week and CPI next week, some uncertainty has been removed. But, the deal is only a 45-day stay, as a new budget must still be resolved before the vote expires. Aside from the potential profit-taking, there isn't a major catalyst for derisking over the weekend.

The Drivers Are Still There

The rising yields have come as the Fed is seen ending its rate hiking cycle. Investors are swayed that the US can avoid a recession, which would allow the Fed to follow through on its promise to keep rates higher for longer. Where the spending issue in Washington can affect markets is the amount: Republicans failed to pass a measure that would reduce spending. Rates on US debt have seen upward pressure as the Treasury is expected to roll over as much as $7.6T in debt over the next year. The prospect of further debt sales could continue to keep yields higher and support the dollar.

On the other hand, historically, the fourth quarter is the best for stocks. The move towards risk appetite could finally put an end to the rising dollar. There are some favourable factors, such as if the Fed keeps from hiking and Q3 earnings starting soon beat estimates. The inverse relationship between stocks and thre dollar could come into play if the US economy remains resilient but not overheating enough to create the threat of further policy tightening. Better economic performance would also be seen as increasing government receipts and reducing the need for debt issuance, reducing some upward pressure on yields.

DXY Still in Bearish Territory Longer term

Completing a triangle and putting a subsequent low under triple digits as a fakeout have triggered a reversal to the US Dollar Index. Now above 105.48 and near an 11-month high of 106.57 that it reached last Thursday, the risk of pullbacks increases, exposing 104.63 and perhaps 103.27. On the flip side, without shifting sentiment to positive above the 50% long-term Fibonacci at 107.00, chances at the golden pocket of 108.78 remain limited.

Source: SpreadEx / US Dollar Index

Key Takeaways

The US dollar has risen over 6% since mid-July. Despite closing lower on Friday, it posted its eleventh consecutive weekly gain. The recent government deal has removed some uncertainty, with the main drivers behind the dollar's growth being the rising yields and the belief that the US can avoid a recession. However, the fourth quarter historically favours stocks, which could potentially put an end to the dollar's rise. Factors like the Fed refraining from further rate hikes and better-than-expected Q3 earnings could contribute to this shift. Additionally, if the US economy performs well without overheating, it could reduce the need for debt issuance and lower upward pressure on yields.