(Bloomberg) -- The dollar is having its best week since 2022. Geopolitical unrest, the odds of lower borrowing costs overseas and a resilient US economy are all spurring the world’s reserve currency higher.
The Bloomberg Dollar Spot Index rose 1.6% this week, its best performance since September 2022 — when the Federal Reserve was still in the middle of its most-aggressive policy tightening campaign in a generation. The dollar’s gains punished Group-of-10 peers where interest rates are largely expected to trail the US.
The yen was hit the hardest, falling 4.4% against the greenback this week — the Japanese currency’s worst performance since 2009.
Now the dollar’s fate rests on how deeply the US central bank unwinds those still high borrowing costs. The greenback advanced for the fifth consecutive session Friday after a report showing healthy demand for US workers erased traders’ wagers on deeper interest rate cuts at the Fed’s November meeting.
“Signs that the labor market is more resilient than expected should help reduce aggressive Fed cut expectations,” said Aroop Chatterjee, a strategist at Wells Fargo. “Pricing for Fed cuts has been much more aggressive than other global central banks over the past couple of months.”
The Fed started its monetary-easing cycle with a half-point cut in September, leaving investors to pour over US data to gauge the health of the economy and the scope of policymakers’ next move. Lower rates usually lead to a weaker domestic currency.
Swaps traders are now factoring in about 50 basis points of Fed policy easing before the end of the year, down from more than 60 basis points on Thursday.
Expectations for other major central banks to keep policy loose and lower borrowing costs faster than the US further bolstered the dollar’s appeal. Bank of England Governor Andrew Bailey suggested policymakers in the UK could take a more aggressive approach to lowering rates.
In Japan, Prime Minister Shigeru Ishiba said the economy isn’t ready yet for further interest-rate hikes, sending the domestic currency tumbling. The jump in the dollar intensified the yen’s slide, making it the worst performer among peers in the Group of 10 this week, followed by the New Zealand dollar.
The conflict in the Middle East also drove investors to seek safety in haven assets, especially the greenback. Still, the dollar’s rally comes shortly after it notched its worst quarter of the year amid expectations of further cuts. The next pivotal report is US inflation, due this coming Thursday.
Meanwhile, dollar bears aren’t ready to completely throw in the towel, the latest Commodity Futures Trading Commission data showed.
Non-commercial investors — a group of speculative market players that includes hedge funds, asset managers and other traders — trimmed dollar short positions to $13.6 billion in the week ending Tuesday, that compares to some $14.8 billion a week earlier when the Fed cut rates, according to CFTC.
“The scale of the dollar’s rally in recent years and the prospect of further Fed rate cuts, suggest the primary trend will be down, but definitely not in a straight line,” wrote analysts at Societe Generale SA, including Kit Juckes.
--With assistance from Carter Johnson and George Lei.
(Updates market moves throughout, adds positioning data.)
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