The U.S. dollar has strengthened against other major currencies as new data on global business activity highlights the stronger position of the United States relative to other economies. S&P Global’s flash U.S. Composite PMI index, which tracks the manufacturing and service sectors, dipped slightly in September but remained above the level that indicates expansion. Despite concerns of a potential recession triggered by the Federal Reserve’s interest rate increases, the U.S. economy has performed better than expected this year.
In contrast, Europe has experienced disappointing economic data, with France witnessing a faster decline in economic activity than anticipated. Surveys covering the entire euro zone suggest that the economy may have contracted in the third quarter. This divergence between the U.S. and other major economies has led to the U.S. dollar outperforming its counterparts.
Market analysts predict that the U.S. will likely continue to outpace the rest of the world in the coming months. Without a sustained pickup in growth in other developed markets, the U.S. dollar is expected to remain strong. As a result, the U.S. dollar index, which measures the currency against six major counterparts, has risen for ten consecutive weeks, marking its longest winning streak in almost a decade.
Federal Reserve Governor Michelle Bowman emphasized the need for further interest rate hikes to control inflation in a timely manner. The Federal Reserve recently left interest rates unchanged but stated that it would maintain them until inflation returns to 2%. This stance contrasts with other central banks, such as the Bank of Japan (BOJ), which opted to keep interest rates in negative territory. The divergence in monetary policy has put downward pressure on the Japanese yen but has benefited the U.S. dollar.
Speculation is increasing that Tokyo might intervene to support the yen, as the currency approaches the threshold of 150 yen to the dollar. The Japanese finance minister has not ruled out any options and has warned against a rapid decline in the yen, which could harm Japan’s trade-reliant economy.
Meanwhile, the British pound has weakened after data revealed that the UK economy slowed sharply in September, heightening concerns of an impending recession. The Bank of England’s decision to halt its interest rate increases following a slowdown in price growth has contributed to the pound’s decline.
Overall, the U.S. dollar’s strength has been reinforced by the favorable economic data coming out of the United States, contrasting with weaker performance in other economies. This trend is likely to persist unless there is a noticeable improvement in other developed markets.