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The U.S. Dollar Index (DXY), which measures the value of the U.S. dollar (USD) against six other major currencies, gave back recent gains ahead of the release of the U.S. personal consumption expenditures (PCE) price index for June. The U.S. dollar index was trading around 104.30 during the Asian session on Friday.
The dollar’s downside may be limited as U.S. Treasury yields rise. At press time, the 2-year and 10-year U.S. Treasury yields were 4.35% and 4.24% respectively. Stronger U.S. economic data has reduced market expectations for a rate cut by the Federal Reserve in September, which may provide support for the dollar.
According to CME Group’s FedWatch Tool, markets are currently pricing in an 88.6% chance of a 25 basis point rate cut at the September meeting, down from 94.0% a week ago.
On Thursday, U.S. second-quarter gross domestic product (GDP) came in stronger than expected. Prior to this, U.S. Purchasing Managers Index (PMI) data released on Wednesday showed that private sector activity expanded at a faster pace in July, highlighting the resilience of the U.S. economy to maintain growth despite high interest rates.
After adjusting for seasonality and inflation, U.S. gross domestic product (GDP) annualized growth was 2.8%, higher than the previous 1.4% and exceeding expectations of 2%. Additionally, the composite PMI climbed to 55.0 from 54.8, reaching its highest level since April 2022, reflecting continued growth over the past 18 months.
Bank of America believes that strong growth in the U.S. economy allows the Federal Open Market Committee (FOMC) to “afford to wait” before implementing any changes. The bank claimed that the economy’s “fundamentals remain solid” and continued to expect the Federal Reserve to begin cutting interest rates in December.
