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Why The US Dollar, A Safe Haven For Worried Investors, Rebounded On Monday

The Invesco DB US Dollar Index Bullish Fund NYSE:UUP rebounded by 0.6% Monday morning after a difficult week last week.

Investors dumped the dollar last week following encouraging inflation data, but Federal Reserve Governor Christopher Waller said Sunday that the Fed still has a long way to go to get inflation under control.

The U.S. dollar took a big hit late last week after the Labor Department reported the consumer price index (CPI) gained 7.7% in October, down from an 8.2% increase in September. In fact, the U.S. dollar index dropped 3.6% in just two days following the CPI report, its worst two-day performance since 2009.

Related Link: Friday Market Wrap: S&P 500 Posts Best Week Since June

In Waller's Words: With the dollar down nearly 4% in a week, Waller said Sunday that the latest CPI reading is "just one data point" and that the Fed will not be backing off in its fight against inflation. Waller said the Fed may opt for less aggressive tightening, but it will not be "softening" its approach to inflation.

"Quit paying attention to the pace and start paying attention to where the endpoint is going to be," Waller said. "Until we get inflation down, that endpoint is still a ways out there."

Related Link: Did The Drop In CPI Inflation Impact The Outlook For Interest Rates?

Even after the reassuring inflation reading, the bond market is still pricing in a 100% chance of at least a 0.5% interest rate hike in December, according to CME Group. The bond market is pricing in an 89.2% chance the Fed will raise interest rates at least another 1% from current levels by May 2023.

Investor Sentiment And The Dollar: The U.S. dollar is considered a safe haven for investors concerned about an economic downturn. On Monday, DataTrek Research co-founder Nicholas Colas said a weakening dollar should be comforting to stock market investors.

"Dollar weakness is a sign of better global investor confidence and risk appetites," Colas said.

Monday's rebound in the U.S. dollar may also be partly driven by ongoing weakness in Bitcoin (CRYPTO: BTC) and other cryptocurrencies as the fallout from Friday's FTX bankruptcy continues. The U.S. dollar has historically had a strong negative correlation with Bitcoin prices, which are down 19.7% in the past week to under $17,000.

Benzinga's Take: It's not surprising that the week the dollar tanked the SPDR S&P 500 ETF Trust NYSE:SPY posted its best week since June. When investors are worried about the outlook for the stock market and the economy, they look to the dollar as a safe haven investment.

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