The U.S. dollar is on track for its best month since in over a year, in part thanks to new Federal Reserve chairman Jerome Powell’s comments on the improving U.S. economic outlook on Tuesday, stirring a discussion whether we’ve finally reached a turning point for buck weakness.
The facts look mixed.
The buck, measured through the ICE U.S. Dollar Index DXY, +0.29% that compares the U.S. currency against six rivals, was the top performer among developed market currencies in February. On Wednesday, the index was on track for a 1.7% gain in February, its first since October, and its biggest jump since February 2017.
“In the month-to-date, the dollar has outperformed all Asian and G10 currencies, with the exception of the safe haven Japanese yen,” wrote Jane Foley, senior FX strategist for Rabobank, on Wednesday.
The yen USDJPY, -0.62% is considered a haven currency, which investors turn to in times of trouble thanks to the ample liquidity that supports it. In early February, global stock markets were taken by a bout of volatility, causing a spike in yen interest. For the month, the Japanese currency is up 2.2% against the dollar, which last bought ¥106.75.
The buck also outperformed most Central and Eastern European currencies, Foley added, such as the Czech koruna USDCZK, +0.1953% or Polish zloty USDPLN, +0.3753% against both of which it gained 2.3% in February. That is despite the fact that those CEE candidates were hailed as strong performers before, benefiting from their hawkish central banks and strong economic growth numbers.
The same goes for Latin American currencies, Foley said, including Mexico’s peso USDMXN, -0.0525% which fell 1% against the buck in February.
On Wednesday, eurozone inflation data disappointed consensus estimates and dragged the euro down, in a week filled with event risk from an important party vote in Germany and the Italian general election.
The euro is the dollar’s main rival and the pairs direction dictates a lot of market sentiment.
So, have we finally reached a turning point for the dollar to snap its prolonged losing streak? Not so fast, analysts say, the weak-dollar thesis runs deeper than to be overturned by one good month.
Over a longer time span, the dollar’s negative weeks and month weigh heavily. Over the past 12 months, for example, the dollar index remains down almost 11%, while it lost 1.6% in the year-to-date.
“Although our house view remains on the dovish side for market expectations, speculation that the Fed may be prepared to consider hiking rates four times this year was boosted yesterday by the upbeat remarks on the U.S. economy from Fed Chair Powell,” Foley added.
While Powell said he supported the continued gradual monetary-policy normalization started by his predecessor Janet Yellen, he also said that the economic outlook was improving, leading market participants to read a potential fourth rate increase this year into his comments.