USD nears its 200-day moving average while the Dollar Index strengthens – BBH

US Dollar Gains Momentum Amid Global Currencies

The US Dollar (USD) has strengthened against most major currencies, with the Dollar Index (DXY) approaching its 200-day moving average, a key resistance point. Should the DXY surpass this level, further upward movement could follow. Nonetheless, differences in monetary policy suggest that any technical-driven surges in the USD are likely to be modest and short-lived. Recent data aligns with Fed funds futures, which currently anticipate a total of 50 basis points in rate cuts by 2026, according to BBH FX analysts.

Potential for Extended USD Strength Through AI-Driven Productivity

December's ADP private payrolls report fell short of expectations, showing an increase of 41,000 jobs compared to the forecasted 50,000 and November’s decline of 32,000. Most of these gains were concentrated in the non-cyclical education and health services sector, which added 39,000 positions. Historically, when job growth is led by non-cyclical sectors, it often signals a forthcoming slowdown in the labor market. This trend was further supported by the November JOLTS report, which indicated a continued decrease in labor demand, as both hiring and job opening dropped to their lowest levels of the past year.

The ISM services index for December continued to reflect robust activity within the services sector, though inflationary pressures eased. The headline reading came in at 54.4, surpassing the consensus estimate of 52.2 and up from November’s 52.6. Notably, New Orders climbed to 57.9—the highest since September 2022—while Employment returned to expansion for the first time since May 2025. Additionally, Prices Paid fell to 64.3, marking a nine-month low compared to November’s 65.4.

Analysts highlight that a surge in productivity driven by artificial intelligence could present a significant upside risk for the USD. Enhanced productivity would enable the Federal Reserve to maintain a tighter policy stance for an extended period. Increased productivity boosts the economy’s potential growth rate, allowing for stronger expansion without fueling inflation. Today, the US is set to release Q3 non-farm productivity figures (scheduled for 1:30pm London, 8:30am New York). Expectations are for productivity (measured as GDP per hour worked) to reach 5.0% SAAR, up from 3.3% in Q2—well above the post-war annual average of 2.1%.