The Fed took a pause in hiking rates but the greenback rallies. After eight sessions of strength, the ascent stalled, however demand reemerged quickly and took the currency to fresh highs. So what’s behind the USD strength after all?
Essentially, it’s more weakness in other currencies rather than dollar appeal. It is just ‘best of a bad bunch’ as, for example, euro suffers from increasing risks to the European economy. The reports point to a slowdown in Germany, the region’s growth engine. And the overall health of the euro area economy is worsening. A worrisome political background in Italy, France and Spain add to the gloomy sentiment in the region.
Meanwhile, the threat of another US government shutdown is abating as Trump shows readiness to sign the border security deal despite he is "not happy" with the deal reached by congressional negotiators this week. The trade spat with China is also on the way to being resolved. And the US fundamentals look better than in other economies.
At the same time, the greenback will hardly be able to significantly extend the current rally without a less dovish rhetoric by the Federal Reserve. As such, the upside potential from here looks limited, though the currency will likely retain its bullish tone in the short term.