US Dollar Taps Double-Decade High Amid Expectations of a Hawkish Fed Decision

The US dollar closed last week as the strongest performer in the forex market after the US dollar index (DXY) hit its highest point in two decades.

The volcanic rally in the single currency came due to increased cautious anticipation of an interest rate hike by the US Federal Reserve in its policy meeting on May 4. While the dollar slowed down towards the end of the week, the bullish momentum will likely continue in the new week.

The Japanese yen came in as the second strongest performer after the dollar, thanks to the intense risk flight across financial markets and consolidation in treasury yields.

On the other spectrum of currencies, risk-off sentiments and worries over China hammered riskier currencies like Aussie and Kiwi. Euro was not far off as the Russian invasion of Ukraine continued with more sanctions in the pipeline.

Sterling and, surprisingly, Swiss Franc also traded on the backfoot, while Loonie traded on a mixed sentiment.

 

US Dollar to Continue on Bullish Momentum?

The DXY tapped the 103.92 top last Thursday, its highest point since December 2002. However, it failed to sustain this momentum and retraced to the 103 area. Additionally, the dollar lost momentum against the yen, which further capped gains for the DXY.

Moving on, economists assert that a 50 basis points (bps) rate hike on Wednesday is certain. However, what they cannot guarantee is whether the Fed could go higher and deliver a 75 bps rate hike in June, as already priced in by the markets. Analysts do not expect a clear answer on this possibility from Fed Chair Jerome Powell at the next FOMC meeting.

That said, NFP and unemployment data should shape the Fed’s interest rate decision for June.