(Bloomberg) — The dollar rallied to a five-month high as investors bet that the resilient US economy means interest rates will need to stay elevated.
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The Bloomberg Dollar Spot Index climbed 0.5% on Tuesday, bringing its advance since mid-July to 4.5%. The ascent has been sharp and steady, with the currency recently notching seven straight weeks of gains, the longest run since 2018.
Investors have become increasingly bullish on the dollar against a backdrop of weak growth in China and Europe. Rising US yields and tumbling equity prices have also bolstered the case. Goldman Sachs Group Inc. wrote in a research report that it now sees a 15% chance the US will slide into recession, down from 20% previously.
“The two main drivers of dollar strength, which are higher yields, and weak growth conditions outside of the US have been thrust straight back into the limelight,” said Simon Harvey, head of FX analysis at Monex Europe. “It’s been quite difficult to argue against the dynamics we’ve been seeing.”
Read More: Goldman Cuts US Recession Chances to 15% on Improved Inflation
If the Bloomberg Dollar Index ends the week higher again, it’ll mark the longest stretch in data going back to 2005.
Recent data suggests the US economy is holding up in the face of massive monetary tightening. At the same time, weak growth in Europe is raising speculation that central banks may need to start cutting rates sooner, while China is facing a severe property slump.
The US currency is the strongest since July against the euro and the pound. Against the yen, it’s approaching the highest since November.
Options traders are also positioning for further strength. One-year risk reversals in the Bloomberg index, a barometer of market sentiment over the long term, are trading near their most bullish levels since April.
And when it comes to positioning, there is room for investors to add to bets for more dollar appreciation. According to CFTC data on non-commercial futures positions, the aggregate long position is near the lowest level in more than two years.
–With assistance from Vassilis Karamanis.
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