Despite Base Rate Cuts... The US Dollar Surges Again

Dollar Index Hits Highest Level Since August

Despite the United States lowering its benchmark interest rate last month for the first time in four and a half years, the US dollar has recently been soaring again.

The Dollar Index, which shows the value of the dollar against six major currencies including the euro and yen, closed at 103.77 on the 17th (local time), marking the highest level since August 1 (104.42). The Dollar Index had also shown a low of 100.24 on the 9th of the same month after the US central bank, the Federal Reserve (Fed), cut interest rates for the first time since March 2020. However, the strong dollar phenomenon still shows no signs of abating.

This is largely due to growing expectations that the US will slow down the pace of rate cuts. Recent US economic indicators have pointed to sustained economic growth. The US Department of Commerce announced that retail sales in September increased by 0.4% month-over-month on a seasonally adjusted basis. This exceeded market expectations (0.3%) and showed a stronger increase compared to August’s 0.1% rise. US retail sales are a crucial indicator, accounting for two-thirds of the US economy. The unemployment data released on the same day also provided reassurance about the US economy.

According to the Chicago Mercantile Exchange (CME) FedWatch Tool, the probability that the federal funds rate will remain unchanged in November was 9.9%, up from the previous day.

The European Central Bank (ECB) cut its policy rate by 25 basis points (1bp = 0.01 percentage points) as expected on the same day, causing the euro to weaken and further fueling the dollar’s strength.

With less than three weeks remaining until the US presidential election, the increasing likelihood of former President Donald Trump, the Republican presidential candidate, winning in seven key battleground states is also cited as a factor strengthening the dollar. Trump’s emphasis on raising tariffs in his economic policies could drive inflation and thus boost the dollar. Higher tariffs could slow economic growth in countries exporting to the US, leading to a decline in the value of their currencies.

Due to the strong dollar, the yen-dollar exchange rate surpassed the 150 yen per dollar level for the first time in about two and a half months. The won-dollar exchange rate also exceeded 1,360 won per dollar.

Signals that consumption, a core component of the US economy, remains healthy have caused US Treasury yields to jump. The 10-year US Treasury yield, which serves as a benchmark in the global bond market, is currently hovering around 4.09%, a level similar to that at the end of July.