“The Strengthening US Dollar and Its Potential Impact on the Market”

The dollar has been strengthening against its main competitors over the past two weeks, adding 2% to a basket of major currencies. rose to 103, where it had not been since the second half of March.

It is noteworthy that the strengthening of the US currency goes hand in hand with the strengthening of stock indices, which is a very unstable combination. The dollar is gaining along with the growing chances of a new rate hike in the middle of next month. Now the market estimates at 30%, against almost 0% in early May.

The chances that the Fed may still tighten policy instead of the widely expected plateau by analysts are increasing against the backdrop of relatively hawkish comments from Fed members. It is quite possible that the market has previously made the mistake of assuming that the US Central Bank will take as a model what it has been doing in the last couple of decades, avoiding recessions through policy easing.

But comments from central bank officials and monetary policy experts are increasingly urging the Fed to stick to Volcker’s behavior, which in the 1980s was not afraid of a recession in order to beat inflation.

Along with the fundamental background, it is also worth noting that the dollar index found support on declines under 101. The same area corresponded to the psychologically significant 1.10 in and was close to 1.25 in .

In terms of history, the current battle for the dollar could be decisive for many quarters to come. Until 2022, the dollar index failed to firmly gain a foothold above this mark. However, its take last year was a real breakthrough for the index, which added almost 15% before turning back down.

It is quite possible that now we see how the former impenetrable resistance is turning into strong support. We saw a similar rise of DXY to a new stage at the end of 2014, and in 2018 and 2021. But the fundamental basis then was the policy of zero interest rates, in which the Fed’s rates were higher than those of its competitors.

Looking further back in history, it is easy to see that in the era of conventional monetary policy, prior to 2008, the dollar was chronically declining as the FSR’s rivals were much more successful in suppressing inflation.

It is worth being prepared for the fact that after a short-term surge, which the dollar index is currently experiencing, a long-term downward reversal will follow. In terms of technical factors, we pay attention to the already accumulated local overbought in the index, which suggests a corrective rollback, at least in the short term.