USD: Recent gains extended - BBH

The US dollar's recent gains have been extended, and it is having one of its best weeks since November 2016, points out the research team at BBH.  

Key Quotes

“The Dollar Index is up 1.7% for the week, as US session is about to start.  Though it took this week's gains to change market's narrative, the fact of the matter, as we have pointed out is that April is the third consecutive month in which the Dollar Index fell in only one week.  That translates into rising 10 of the past 13 weeks.”

“A combination of market positioning, such as the speculative record net long euro position in the futures market as of April 17, rising US interest rates, and diverging economic performances (data surprises indices) seemed to have spurred the move.  Although in some circles, the dollar's "exorbitant privilege" may still be discussed,  the US interest rate premium over Germany has never been higher.  The interest rate premium over JGBs is sufficient to begin enticing Japanese asset managers to boost their unhedged allocation.”

“There are three drivers of the rise in US rates:  Federal Reserve rate hike intentions, rising inflation expectations, and supply considerations.  Suffice it is here to share three observations.  First, next week there is a reasonably good chance that the core PCE deflator, the Fed's preferred measure, will reach the 2% target for the first time in around five years.  Second, Treasury announces the quarterly refunding details next week.  The size of each offering may increase, including the TIPS (unlike the previous quarter).  Third, the market is confident of a June Fed hike and a statement next week that is more confident (hawkish hold).”