As Fed Hawks Push The Market, The US Dollar Index (DXY) Rises To A Six-Week High Over 104.00

The US Dollar Index (DXY) posts slight gains near 104.15 in early Friday trading as bulls flirt with the six-week high. Nonetheless, the hawkish Federal Reserve (Fed) statement and favorable US statistics, as well as US-China tensions, could be viewed as having played key roles in illustrating the DXY's three-day gain.

Wednesday drew major attention to the US Producer Price Index (PPI) for January, as its 0.7% MoM increase was the biggest since June. The improvement in US Initial Jobless Claims for the week ending February 10, which came in at 194K compared to 200K expected and 195K prior, was very positive. In contrast, the fall in Housing Starts in January and the Philadelphia Fed Manufacturing Survey in February appear to have received attention.

Following the release of the data, James Bullard of the Federal Reserve Bank of St. Louis and Loretta Mester of the Federal Reserve Bank of Cleveland expressed their hawkish inclination and supported the dollar. Bullard of the Federal Reserve noted, "Continued policy rate rises can help lock in a disinflationary trend in 2023, even with steady growth and robust labor markets, by maintaining low inflation expectations." In a similar spirit, Fed's Mester stated that the Fed will need to rise beyond 5% and maintain that level for some time. The policymaker stated that she cannot predict if the Fed would demand a greater rate hike at the next policy meeting, but she does not intend to surprise the markets.

Notably, the most recent FEDWATCH data from Reuters says that interest rate futures imply US interest rates could peak near 5.25 percent in July before declining to 5 percent by year's end. The same signals a greater policy reversal than the Fed's peak of 5.10% in December, which in turn suggests a few more rate hikes from the Fed and supports US Dollar bulls.

On a separate page, the fresh US-China tensions and Russia's determination to back down when it comes to attacking Ukraine weigh further on risk appetite and the EUR/USD exchange rate as demand for the US Dollar rises. During an interview with NBC News, Vice President of the United States Joseph Biden launched shots at his Chinese counterpart and expressed his hopes for a chat with the Chinese leader. According to Reuters, US President Biden added, "I don't believe Xi intends to fundamentally sever ties with the United States and with me."

Wall Street ended with a loss, while S&P 500 Futures were down 0.30 percent intraday at the time of publication. The yields on 2-year US Treasury notes increased to their highest levels since November 2022, completing the day at 4.64 percent. The yields on 10-year US Treasury bonds reached their highest levels in 2023 with the most recent reading of 3.86 percent.

A light calendar on Friday should give the DXY bulls the upper hand ahead of next week's Monetary Policy Meeting Minutes for the Federal Open Market Committee's (FOMC) most recent activity, given the added fire to the hawkish Federal Reserve worries, supported by solid US data.