The greenback grinds higher and “carry” currencies crack

The US dollar looks set to end the week higher against nearly all other major currencies. Remarkably, the DXY Index is set for an eight consecutive weekly rise, something that has rarely occurred since 1990. And while that index is euro-heavy, there are growing signs that the latest dollar rally is broadening out. That, in turn, seems to mostly reflect that this week's data releases have generally pushed US Treasury yields higher relative to those elsewhere, weighed on risk sentiment, and reinforced the narrative of US economic resilience amid a weak global backdrop.

This narrative (and the dollar’s win streak) is set to be challenged next week amid a raft of key data releases and policy announcements. We anticipate US CPI data for August to show core inflation there remains on a downward trend. Meanwhile, we think credit and activity data out of China will show some signs of stabilisation (like trade data released earlier this week), and expect the ECB to press ahead with one final hike on Thursday despite the dismal data out of the euro-zone this week. So, on balance, we wouldn’t be surprised if some steam came out of the dollar’s rally. That said, the overall backdrop suggests to us the greenback will strengthen further over the next couple of quarters.