Dollar Breaks New Record High on Anticipation of a More Aggressive Rate Hike

The US dollar (USD) resumed its aggressive bull run on Thursday, tapping a new two-decade high, returning the euro (EUR) to parity. The bullish move comes as market participants anticipate a more aggressive Federal Reserve rate hike in July to combat the rising inflation figures.

The ongoing global economic crisis has bolstered the safe-haven appeal of the USD, shuttling the US Dollar Index (DXY)—which tracks the dollar’s performance against six counterparts—to a 13% high year-to-date (YTD) at 108.76. At press time, the DXY trades at +0.62%.

Meanwhile, the dollar trades +1.37% against the Japanese yen (JPY) as the policy difference between the US Fed and the Bank of Japan (BoJ) widens. As a result, the dollar has tapped a 24-high of 139.38 against the yen.

The euro returned to parity with the dollar on Thursday after a rebound on Wednesday, bringing it back to its two-decade low. Currently, the Cable trades at 1.0007 or -0.44%.

Overheated Inflation Data Could Prompt Further Policy Tightening, US Dollar to Record More Rallies

A fresh set of overheated US inflation data on Wednesday and an aggressive 100 basis point rate hike by the Bank of Canada (BoC) increased investors’ expectations of a drastic US Fed policy tightening in July. Analysts at MUFG explained:

“The price action reflects building fears that the Fed will strangle the life out of the US recovery by responding more aggressively to dampen upside inflation risks.”

That said, market reports suggest traders expect the Federal Reserve to raise its lending rates by 100 basis points (bps) in its next policy meeting, scheduled for July 26 – 27. At this point, a minimum rate hike by 75 bps seems locked in, increasing the chances of the USD maintaining an upward trajectory towards 109.50 by the end of July.