The American economy is continuing to beat expectations, especially relative to the performance of many economies around the globe. And that’s sending the U.S. dollar surging.
On Tuesday, the Commerce Department announced that in the third quarter, gross domestic product rose at a seasonally adjusted annual rate of 5.0 percent, nicely above the earlier estimate of 3.9 percent. Consequently, the U.S. dollar index, which compares the U.S. dollar to a basket of six currencies, jumped to the highest level since April 2006 on Tuesday.
Good economic news always tends to boost a nation’s currency, but that is doubly true in the current environment, as the Federal Reserve is widely expected to raise short-term rates in 2015. Generally speaking, the better the economy, the sooner the Fed is likely to raise its federal funds rate target. And greater short-term rates would make it more attractive to hold dollars rather than other currencies.
Expectations of an earlier Fed move could certainly be sensed in Tuesday trading. The yield on two-year Treasury notes rose to the highest level since April 2011 after that GDP report.
By the work of Michael Block, “This yield is telling you that the market is nervous or expectant about a rate hike next year,” the chief strategist at Rhino Trading Partners wrote in a Tuesday note to clients.