It was a great day to be long U.S. dollars. The greenback traded higher against all of the major currencies in a move that took USD/JPY to its strongest level in 11 months. The Australian dollar was hit the hardest by the dollar’s rise while sterling was the most resilient. Wednesday’s move was driven by the classic story of economic dominance. The largest economy in the world is growing the fastest. While economic reports from around the world surprised to the downside, U.S. data is consistently beating expectations and reinforcing the positive momentum. According to the latest reports, service-sector activity expanded at its fastest pace in more than 20 years. The details of the ISM non-manufacturing report showed broad-based improvements in prices, new orders, backlogs and employment. In response, the 10-year US Treasury yields jumped to their highest level in 7 years and this move played an important role in driving the US dollar higher.

Looking ahead, there are a few reasons why we think the dollar’s rally is durable:

1. The US economy is strong and nonfarm payrolls will confirm that – The employment component of the non-manufacturing ISM report rose for the third consecutive month and this uptick suggests that payroll growth could exceed 200K in September

2. Hawkish Fed comments – A number of Fed officials spoke Wednesday and many of them seem see significant upside risk to inflation. Fed Chair Powell in particular believes that the expansion can continue for quite some time. Prices in the service sector increased and there’s a good chance that PPI and CPI will rise as well.

3. There’s no resistance for 10-year yields until 3.5% and that is consistent with USD/JPY rising to at least 115. USD/JPY is trading above the 200-week SMA for the first time since early January and a move like this usually coincides with a 300-400 pip rally from the SMA at 113.00

4. Data abroad hasn’t been great – While the US prints better than expected numbers, the latest Eurozone, UK, Australia and New Zealand were weaker than expected. Until this changes, diverging economic performance is a big reason why the dollar’s rally can't last.
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