Dollar Maintains Strong mid Rebound, Still Not in a Long-Term Correction

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The dollar rose substantially last week, supported by the FOMC’s surprise hawkish expectations. On a severe selloff in markets, the yen came in second, while the euro came in third. The weakest performers were commodity currencies, with the Australian dollar leading the way, followed by the New Zealand Dollar. The Swiss Franc, on the other hand, was one of the weakest currencies.

Nonetheless, unless the economy and health conditions demand a rate hike by the Fed next year, the Dollar will likely continue to move in the opposite direction of risk appetite. For the time being, we are just seeing a medium-term correction in equities, rather than a long-term decline.

Last week’s FOMC rate prediction was substantially more hawkish than projected. The Federal Reserve now expects two rate rises in 2023. Furthermore, 7 of the 18 policymakers had planned one or two raises in 2022. With a few more months of solid GDP and inflation data, the tide could easily shift toward a raise next year. The news triggered a big gain in the dollar and a sharp selloff in stocks towards the end of the week.

Financial Markets Show the Dollar Continues To Gain

In the prior week, the dollar continued to rise, achieving its greatest weekly performance of the year. The surge was a continuation of the post-Fed bounce when the US central bank surprised investors by bringing forward the possibility of rate hikes to 2023.

Stocks in Europe and the United States sank, putting pressure on high-yielding currencies. Even though US government bond yields have continued to fall from post-Fed highs, the dollar rally has continued. The 10-year US Treasury note yielded 1.44 percent at the end of the week.

The EUR/USD exchange rate finished at 1.1860, while the GBP/USD is trading around 1.3800, both around two-month lows. President Christine Lagarde of the European Central Bank is scheduled to speak on Monday, and- may mention monetary policy. The European Central Bank’s ultra-loose monetary policy is unlikely to change.