The U.S. dollar index (DXY) is on the rise again, recovering from its end of last week’s losses. Buyers are clearly determined to push the index back above the 105.00 mark, and they have sufficient fundamental ground for this. This week traders turned their sights on the Federal Reserve Chairman Jerome Powell’s testimony before Congress. As expected, in its semiannual report on monetary policy, the Fed confirmed its intention to raise rates until the inflation rate eases back to the 2% target. In fact, this means that the U.S. central bank will keep tightening monetary policy quite aggressively in the upcoming meetings, promising an ‘unconditional’ approach to taking down inflation and restoring price stability.
According to projections, the Fed’s benchmark rate will end the year at 3.5%, which will certainly support a further rally in U.S. Treasury bonds and help the dollar sustain its upside momentum. Member of the Board of Governors of the Federal Reserve Christopher J. Waller and Minneapolis Fed President Neel Kashkari said Monday they would support another 75 basis point rate hike in July.
Meanwhile, Cleveland Federal Reserve Bank President Loretta Mester said it will take two years for inflation to fall to the Fed’s 2% target. If the Fed’s efforts to curb inflation prove ineffective this year, the aggressive rate hike cycle will continue into 2023, making the dollar one of the best assets for long-term purchases.
Also, note the comments made by St. Louis Fed President James Bullard earlier in the week. He expressed hopes that the U.S. economy repeats the outcome of 1994’s soft landing, in which a recession was averted and was followed by a period of rapid growth. Market participants believe that even if “tight” monetary policy triggers a recession first, the dollar will still be the gainer due to its safe-haven properties and ability to rise during periods of economic uncertainty. Goldman Sachs Group Inc. economists warned of a growing likelihood that the US economy will fall into recession. The Goldman team now sees a 30% probability of entering a recession over the next year, up from 15% previously.
Given the above, the current conditions in the financial markets suggest further strengthening of the U.S. dollar, which may well support the DXY recovery to 107.00.