Rising Concerns for Global Economy, Inflation Propels U.S. Dollar to Six-Month High

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Worries regarding global economic growth and the potential resurgence of inflation have contributed to a significant increase in the value of the U.S. dollar against major counterparts, according to analysts. The U.S. dollar index, a widely-tracked measure of the currency’s strength, is currently trading at its highest level in nearly six months.

Leading market analyst at CMC Markets UK, Michael Hewson, explains that the exceptional performance of the U.S. dollar is aligned with the growing optimism surrounding the U.S. economy. Goldman Sachs also shares this sentiment, stating that the probability of a U.S. recession has dropped to just 15%. This positive outlook has boosted the value of the U.S. dollar significantly.

The ICE U.S. Dollar Index DXY, which gauges the currency against other major currencies, has climbed by 0.5% to reach 104.80, with a peak of 104.91. This level has not been seen since March 15, as reported by FactSet.

In contrast, the euro, which holds the greatest weight in the index, has experienced a decline of 0.7%, reaching $1.0724—a three-month low. The U.S. dollar has also surged by 0.9% against the Japanese yen, reaching 147.77 yen—its highest level since November. The British pound has likewise faced a setback, dropping by 0.6% to $1.2561—the lowest point since June.

While the prospects for the U.S. economy remain optimistic, other parts of the world display a gloomier outlook. China’s service sector expansion in August—which was the slowest in eight months—serves as further evidence of a faltering post-pandemic recovery. Additionally, a survey from the eurozone reveals that output in the bloc contracted at its most rapid pace in almost three years.

Another aspect supporting the U.S. dollar is its resilience, which differs from the situation in Europe. Disappointing Purchasing Managers’ Index (PMI) data from the services sector in Spain and Italy, following similar contractions in Germany and France, suggests a higher likelihood of imminent rate cuts in Europe. This further strengthens the position of the U.S. dollar.

However, despite these positive developments, not all was favorable for U.S. markets on Tuesday.

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U.S. Stocks Slip as Economic Worries Linger

Market Recap

U.S. stocks saw a slight decline as investors returned from the Labor Day holiday. The Dow Jones Industrial Average (DJIA) dropped by approximately 140 points, or 0.4%, while the S&P 500 (SPX) experienced a 0.3% decline.

  • Reason for Decline: Market analysts attribute the weakness in U.S. equities to concerns about slowing economic growth and the recent surge in crude oil prices. These factors have raised fears of stagflation, which contrasts with the positive economic scenario reflected in Friday’s August jobs report.

Oil Prices Soar, Adding to Economic Concerns

On Tuesday, global oil prices experienced a significant jump. The benchmark Brent reached a 2023 high, and West Texas Intermediate closed at similar levels. This increase came after Saudi Arabia announced a voluntary production cut of 1 million barrels per day through the end of the year, along with Russia extending its supply cut.

  • Related Read: Commodity Corner: Is $100 Oil on the Horizon for the U.S.?

Technical Analysis: Dollar Index Breaks Resistance

Fawad Razaqzada, market analyst at City Index and Forex.com, observed that the dollar index has recently surpassed its previous highs and resistance levels between 104.29 and 104.70. This range acted as strong resistance in both May and August. According to Razaqzada, maintaining control above this zone is crucial for the bulls.

  • Price Target: If the current trend continues, Razaqzada expects the next target for bulls to be the index’s March high at 105.88.

Conclusion

Despite returning from a long weekend, U.S. stock markets experienced a dip due to concerns about overall economic growth and rising oil prices. Investors will be closely monitoring these factors moving forward.

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