By Joseph Adinolfi
An index tracking the strength of the U.S. dollar against a basket of major currencies touched its highest level in four-and-a-half months on Tuesday, adding to the headwinds facing U.S. stocks.
The ICE U.S. Dollar Index, which gauges the dollar’s strength against a basket of six others, with the euro receiving the heaviest weight, traded as high as 105.1, its highest level since Nov. 14, according to FactSet data.
The dollar has been rising all year, bolstered by investors dialing back their expectations for how quickly the Federal Reserve will cut interest rates.
The adjustment to expectations followed Monday’s stronger than expected reading from the Institute for Supply Management’s U.S. manufacturing survey, which rose to its highest level in 18 months in March. Investors focused on a sub-index measuring prices paid by manufacturers for their materials, which rose to 55.8, its highest level since July 2022, adding to fears about a resurgence of inflation.
Economists attributed the unexpectedly sharp rise to the jump in commodity prices that has carried crude oil to its highest price since October, with U.S.-traded crude futures (CL.1) topping $85 a barrel early Tuesday.
See: U.S. oil benchmark tops $85 a barrel as Middle East tensions escalate
Raffi Boyadjian, lead investment analyst at XM, said the data pushed back on expectations for a June rate cut by the Fed, helping to drive the dollar and Treasury yields higher.
“Hopes for an early rate cut by the Fed were dashed again on Monday following yet another upbeat data release out of the U.S.,” Boyadjian said.
Treasury yields, which exert a strong influence on the direction of the dollar, continued to climb early Tuesday, with the yield on the 10-year Treasury note BX:TMUBMUSD10Y touching 4.37%, its highest level since late November, FactSet data show.
U.S. stocks were headed for a lower open on Tuesday, putting them on track to kick off the second quarter with back-to-back daily losses. Stock futures tied to the S&P 500 (ES00) were down by 0.4% at 5,296, while futures tied to the Nasdaq-100 (NQ00) were off by 0.5% at 18,511. Futures on the Dow Jones Industrial Average (YM00) fell by 214 points, or 0.5%, to 39,681.
A stronger dollar is seen as a headwind for U.S. stocks. The dollar rallied sharply in 2022 as global stocks and bonds sold off, with investors from around the world seeking safety in the greenback.
-Joseph Adinolfi
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04-02-24 0822ET
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