Monthly Wrap: USD hits best levels since January

• USD monthly highs: £0.73213, €0.83206, AU$1.33281, NZ$1.42664, C$1.29367
• USD monthly lows: £0.69608, €0.80631, AU$1.28098, NZ$1.35308, C$1.25297
• US inflation nears Fed targets
• Hawkish Fed expectations lend support to USD

April saw the US dollar (USD) revived and reinvigorated. The doldrums of March were undone, leaving the ‘Buck’ free of prior concerns regarding trade.

The US dollar index – a measure of the dollar against a basket of its major peers – soared to 92.26 by the 1 May; a level not seen since early January.

This uptick came amid a month-long rally for the currency, with a combination of rising US government bond yields, upbeat economic growth indicators and hawkish hopes for the US Federal Reserve sending it higher and higher.

Some of the more significant data releases included a marked rise in a measure of underlying inflation, (which nearly hit the Federal Reserve’s 2% target) and an ongoing fall in unemployment (which remained at historic lows of 4.1%).

Beyond this, business optimism – supported by tax reform measures – also saw a recovery, with concerns regarding the possibility of trade retaliation from China moving into the background as Chinese leader Xi Jinping finally capitulated to US pressure.

Xi promised that China will ‘take down its trade barriers’ and that ‘taxes will become reciprocal and a deal will be made on intellectual property’.

The primary driver, however, seemed to be the surging US Treasury yields, which saw a rise to the key level of 3% – the first time that this has occurred since 2014.

Meanwhile, the US Federal Reserve is still on track to raise interest rates two or three times more this year, which effectively positions the Fed as the most hawkish institution out of all of the other major central banks.
Combined, this has made the outlook for the US dollar rather cheery.

But what can we expect next month?

The biggest indicator will be the proposed trajectory of US Fed policy, with any indication that the central bank is still on track to raise interest rates three times this year (or even four) liable to keep the ‘Greenback’ in good form.

Another notable mover will be trade negotiations with China, with the US looking to have a ‘very frank’ discussion on trade imbalances after threatening to slap tariffs on over $150billion in Chinese exports.

If these negotiations prove fruitful then we could see market anxieties regarding the possibility of a trade war fully evaporating, although negotiations between the US and the European Union regarding steel and aluminium tariffs will likely take centre stage.