Market Extra: Why the U.S. dollar is struggling even as the Fed keeps hiking rates

by | Feb 9, 2023 | Stock Market

The U.S. dollar’s recent bounce is fading, encouraging bears who expect the currency to see only fleeting periods of gains in the months ahead. The dollar bounced strongly versus major counterparts after last week’s jaw-dropping employment data, boosting the greenback’s appeal as a safe-haven currency as investors re-evaluate bets on how high the Federal Reserve will raise rates to put a lid on inflation.

The ICE U.S. Dollar Index
a measure of the currency against a basket of six major rivals, was down 0.2% at 103.20 Thursday, putting it on track for a fractional loss.

The index jumped 1.1% to 102.92 on Friday following the jobs data and rallied to one-month high of 103.96 on Tuesday after Fed Chair Jerome Powell said more interest rate rise will be needed to cool inflation and the red-hot U.S. jobs market. The rally made investors wonder whether a still-hawkish Fed could keep the dollar supported and help it regain all the losses made in the past four months, after it ended a surge that took the index to a 20-year high. The dollar index has fallen 8.7% since mid-October after rallying for most of 2022, according to Dow Jones Market Data.   See: How the U.S. dollar could put this stock-market rally to a big test Steve Barrow, head of G-10 strategy at Standard Bank, doesn’t think the Fed’s commitment to wringing inflation out of the economy will put a rocket under the dollar. “As long as the market is sure that the Fed is at, or close to, the top in the rate cycle, and can still see the prospect of cuts next year, the dollar should fall — as long as this policy position does not undermine asset prices, such as stocks,” Barrow said in a Tuesday note.  “In our view, the risk of a significant and prolonged dollar surge from monetary policy alone comes if the Fed proves to be behind the inflation curve again because labor market pressure, and perhaps other factors, cause a re-acceleration of inflation that threatens multiple rate hikes,” he added.  Barrow and his team acknowledge that the Fed may have to take rates “marginally higher” than the market consensus, which could aid the …

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