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US dollar will remain dominant for the time being as long as the Federal Reserve maintains its hawkish stance on interest rate hikes and its plans to unwind some of its pandemic-related bond purchases.
The dollar index, which gained nearly 7% against major currencies last year, has continued its stellar performance this year, rising another 4% so far, with nearly half of those gains occurring in March alone.
Much of that strength was driven by comments from Federal Reserve officials, who, in addition to calling for 50-basis-point rate hikes, are openly discussing aggressively shrinking the size of the Fed’s nearly $9 trillion balance sheet.
This has driven U.S. Treasury yields to multi-year highs and investors into dollar-denominated assets, a key component of the strong dollar trade that is unlikely to fade anytime soon, keeping the currency well-bid.
According to data released on Friday by the US Commodity Futures Trading Commission, market speculators’ net long bets on the dollar reached an 11-week high in the most recent week.
More than two-thirds of the analysts who responded to a separate question, 37 of 53, said the strong dollar trade would last at least another three months, with 17 saying it would last longer.
Thirteen respondents said the trade would be over in three months, while the remaining three said it was already over.
The Fed is arranging some forceful fixing this year. The fed finances rate is supposed to arrive at 3% in the principal quarter of the following year, however (they could) cut rates by the final quarter of 2023.
However, there are numerous reasons for the delay, not the least of which is the Russia-Ukraine war, which has sent the cost of energy and commodities skyrocketing, with Europe bearing the brunt of the burden.
Many developments in the energy market can be seen as the most significant upfront negative for EUR/USD – elevated prices are not going away anytime soon,” said George Saravelos, global head of FX research at Deutsche Bank.
On the other hand, further Fed repricing is becoming less beneficial to the dollar, the ECB has outperformed our (hawkish) expectations, and Europe’s fiscal response to offset the near-term growth impact appears substantial.
The euro was expected to recover its over 4% losses for the year and rise to $1.14 in a year, a view analysts have held for more than two years. Since September 2020, the euro has not gained ground against the US dollar for three months in a row.