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The US dollar was surging against major rivals on Thursday, adding to gains made the day before after Federal Reserve Chairman Jerome Powell declined several opportunities during a news conference to downplay the prospect of aggressive interest rate hikes and other measures aimed at bringing inflation under control. 

The ICE US Dollar Index DXY, -0.06 percent, which measures the currency against a basket of six major competitors, increased 1.3 percent to 97.24, reaching a high not seen since mid-2020. Following a slow start, the index is blazing in 2022, up 2.3 percent so far in January. 

The dollar has risen in tandem with a rise in short-term Treasury rates, which are more susceptible to Fed rate predictions.

On Thursday, the yield on the 2-year Treasury note TMUBMUSD02Y, 1.176 percent, rose roughly 10 basis points to around 1.171 percent, while fed-funds futures showed traders pencilling in more aggressive rate-hike forecasts. 

With all eyes on the Fed, the dollar has further opportunity to rise as traders increase their expectations of how far policymakers would eventually raise the fed-funds rate. Investors are expecting a so-called terminal rate of less than 2%, or around 75 basis points less tightening than the Fed offered when the dollar peaked in late 2016. 

With Fed policy at the forefront, the dollar has opportunity to appreciate as market players price in a higher terminal rate, implying that the currency is nearing the end of its uptrend.

As the global economy recovers from the worst of the COVID pandemic this year, market attention will shift to monetary policy normalisation and growth outside the United States, with the best currency returns in the second half of this year likely to come from countries other than the major developed economies. 

Meanwhile, the dollar’s rise was causing rippling effects in other markets, including a drop in gold futures GC00, -0.50 percent and a pullback in oil futures CL00, 2.15 percent from levels last seen in 2014.

Meanwhile, stock market investors were grappling with expectations surrounding the Fed’s policy path and economic data, with U.S. equities jumping higher in early trade Thursday, but in keeping with recent choppy trading action, trimmed or gave up strong gains in afternoon action, with the Dow Jones Industrial Average DJIA, -0.60 percent clinging to a gain of 78 points, or 0.2 percent, while the S&P 500 SPX, -0.41 percent edged down 0.1