Once again, The US Dollar King left all other currencies behind. The rally in the greenback appears to be accelerating following a spate of dollar-supportive and largely positive news developments last week.
The most obvious event was the Federal Reserve finally pulling the pin on rates, lifting the Fed Funds rate 25 basis points to a range of 0.50% - 0.75%. The move had been widely anticipated for far too long but now that it's done, the talk has moved to the timing and pace of future hikes. Both the Fed's dot plots (FOMC's Summary of Economic Projections) and Chair Yellen herself called the expectations for 3 instead of 2 rate hikes next year as a "modest adjustment".
Mr. Market initially sold off both equities and bonds in response, but the correction lasted just a day or so. The emerging view is that a rising equity market along with rising bond yields indicates not only that better economic times may be approaching, but that the time for 'emergency' low interest rates may have passed. This would imply a return to normalcy as regards interest rates, corporate bond yields, mortgage rates and the like – something long overdue. Not overnight, as much still depends on President-elect Donald Trump and his economic policies once he assumes office a little over a month from now, but investors evidently like what they have been hearing from Mr. Trump so far. Certainly equity traders have been the most 'exuberant' – where have we heard that term before – setting several record closes in the Dow and, essentially, shrugging off the Fed rate hike. In fact, with the Dow approaching 20,000, it could be argued that Fed rate hikes now constitute a bullish signal.
Despite the recent to-do over recounts, fake news and Russian hacking etc., Mr. Trump evidently has solid support in most of America, as the graph below, shaded for representation in the House, shows.
The bond market, as usual, spent its time scanning the sunny skies of market euphoria for some clouds however wispy and found them. US Treasury bonds continued declining in price, with the bellwether 10-year notes touching 2.60% yield and 30-year notes trading up to 3.16%. Rising bond yields in America will support the greenback and put pressure on other currencies, notably the EUR, CAD and JPY, whose central banks are still in the currency-depreciation business. Even the Fed, in their statement following the rate hike last Wednesday, still sounded a cautious note on US growth going forward, with predictions clustered around the 2.0% level for 2017 to 2019. Without doubt, Mr. Trump will be determined to top those estimates, or find himself a new cabinet.
Another victim of a rising dollar is oil. Early last week WTI traded as high as $54 USD/bbl on the OPEC pricing agreement but, by week's end, had faded to the low $50 range after briefly trading with a $49 handle.