• The US dollar continues to hold firm against other major currencies on rising to two months high last week. Dollar strength stems from improving the US economic outlook.
  • The US dollar strength will again come under scrutiny with the release of the US inflation data later in the week. 
  • Commodity currencies also continue to hold firm against the dollar. Commodity currencies are strengthening in response to oil prices rising to one-year highs. 

The US dollar started the week on a back foot, plunging against major commodity exporters’ currencies, early Monday morning. The greenback fell as investors switched their attention to currencies likely to benefit as commodity prices edge higher.

Dollar strength

WTI and Brent crude oil prices

Oil is one of the commodities that have been on a fine run in recent weeks powering through the $70 a barrel psychological level. Metal prices are also seen rising across the board as improving economic sentiments worldwide continues to fuel strong demand for industrial metals.

Besides, the US dollar remained under pressure against the British pound and the euro. However, it remained resilient against the yen and Swiss francs in response to steepening yield curve with Treasury yield at one year high.

However, amid the weakness early Monday morning, the bullishness around the dollar remains intact. The dollar has continued to strengthen across the board as investors react to the rate at which the US economy appears to be bouncing from the COVID-19 pandemic shackles.

DXY chart

February’s Non-Farm payroll report that indicated the US economy added 379,000 jobs against an expected 182,000 has all but continued to affirm resiliency of the economy conversely dollar strength. The better-than-expected report underscores US economy strength amid the vaccination drive and economy reopening.

The US inflation

As economic releases continue to top expectations, the US dollar is expected to continue strengthening across the board after plunging to two-year lows early in the year. Treasury yields marching higher are another development likely to continue offering strength to the greenback. The US dollar looks set to continue strengthening against the majors on improving the US economic outlook.

The dollar will once again be in the spotlight with key economic releases on tap. C, the US inflation data is likely to shed more light on the US economy’s health, conversely, influence the dollar strength. Analysts are already projecting a year-over-year increase to 1.7%, up from the prior 1.4%. Core inflation, which excludes energy prices and other volatile items, is likely to remain at 1.4%.

The US inflation

A spike in oil prices above the $65 a barrel level is one of the developments that fuel concerns of heightened inflation levels. A better-than-expected inflation data is likely to inspire additional confidence in the US economic recovery, conversely fuel further dollar strength.

While sentiments on the dollar have improved significantly because of impressive economic data and the $1.9 trillion stimulus package’s passing, the currency could remain under pressure against commodity prices.

NZD and AUD resiliency

According to the foreign exchange strategist at Daiwa Securities, Yukio Ishizuki, there is a significant divergence between commodities and the US dollar. Commodity prices are not coming down even as the US dollar continues to strengthen across the board.

Likewise, it is highly unlikely that the dollar will strengthen against the Aussie and the Kiwi that benefit a great deal from rising commodity prices. While the New Zealand dollar looks increasingly bearish on plunging to two months lows last week.

 The New Zealand dollar has gained 0.18% early Monday morning to reach highs of 0.7190 against the dollar. The Australian dollar has also gained substantially after initially plunging to one-month lows against the dollar. The Aussie was up by 0.3% early Monday morning to 0.7720 against the dollar.

Daily AUD chart

The Kiwi and the Aussie are expected to continue rising as the global commodities trade picks paces as they are some of the biggest commodity exporters.