The Dollar index is at a 20-year high. The Fed’s decision to hike rates has brought a surge in the Dollar index, as it shot above the 104.00 mark.
Dollar Index Surges Above 104.00 Mark
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The Dollar index gained strength and moved northwards to touch 104.20 during early trading hours on Monday, May 9. A surge above this level will keep the DXY on a positive note.
The USD has support at the 102.48 level, which are the lows reached last week. After the sharp surge, the DXY may fall to support levels, say analysts.
The Dollar index gained 8% in 2022, and in the last 12 months, it shot up 14%. The US Dollar has garnered strength against major currencies. The positive move has pulled the DXY towards levels last seen in December 2002.
The Fed Hikes Rates by 0.5%
At the FOMC meeting on Wednesday, May 4, the Fed raised interest rates by 0.50%. It has decided to reduce its bond balance, placed at $9 trillion in June. The Feds is on a drive to tighten its monetary policy to curb its elevated inflation level. There will be further hikes in interest rates, announced Fed Chairman Jerome Powell.
Previously, in March 2022, the Fed hiked rates by 0.25%. The Fed has tightened its monetary policy to bring down inflation. The Fed intends to further reduce liquidity by reducing its bond holdings by about $1 trillion per annum. The US has a national debt of more than $30 trillion to be paid off.
Investors prefer to invest in the US Dollar as a safe-haven investment. With the Russian war on Ukraine, investors prefer to stay invested in the US Dollar as a safe alternative, causing a surge in prices.
Despite covid infections lower across various countries, the number of people infected by the virus has multiplied in China. Lockdowns and restrictions have become a norm in the Chinese economy, and investors are wary of another downturn in the forex market, which has led to the demand for the safe-haven greenback.
The 10-year benchmark is at the 3.2% zone, while the 30-year bond is at the 3.30 region. The rise in Treasury Yields attracts new buying in hedge funds.
Fed Hikes Interest Rates to Curb Inflation in the US
Inflation is at a 4-decade high. The huge financial stimulus brought in in 2020 and 2021 to handle the economic downturn caused by the pandemic has added to the surge in inflation. Inflation was at 8.5% in March, the highest in forty years.
High inflation has led to a supply chain crisis. The hike in rates may help to bring down supply chain disruptions and curb inflation.
It will become tougher for credit cardholders who own large debts, as rates are high. With higher rates consumers may have to pay more as debt repayments. Households have to address the additional burden of paying higher interests amid high inflation. Authorities warn households to make payments promptly to protect themselves. Purchasing a car and shopping for a home may become costlier. It is best to repay the debt entirely, say experts.
The Fed has to be aggressive in its rate hikes to address inflation concerns, advice experts. Central banks in the UK and Australia raised rates to handle high inflation.
Stock and Crypto Markets Move Lower
The US stock market slid lower on the Dollar rally. The stock market across the globe saw a huge downturn with the US Dollar prices racing ahead. Crude prices are trading above the $100 mark, and covid cases are increasing in China. Shanghai is under a severe lockdown, and there is fear that the pandemic may extend to other countries. More than 25 million people in Shanghai face lockdown restrictions.
The stock market saw a big surge in 2021 with the heavy financial stimulus that was induced into the economy when the pandemic was at its worst. In 2022, stimulus package easing took place. Investors now expect a downturn in the forex markets, with high volatility. The crypto prices of leading cryptocurrencies may also move lower with the hike in interest rates.
Japanese Yen at Multi-Year Low
The USD to Japanese Yen surged higher in the forex market with the US Dollar gaining strength. The US Dollar trades above the 103 level to further weaken the Japanese Yen.
The Japanese Yen is at a 2-decade low, at levels last seen in March 2002. The US dollar against the Japanese Yen is up 13% this year.
The US Dollar index moves ahead with renewed strength against a basket of major currencies. However, we can expect a slight correction after the sharp surge. Geopolitical tensions may hamper the DXY’s upward move if there is a further escalation in the Russian-Ukraine conflict. Global stock indices are moving lower. Gold prices have fallen to $1,860 per ounce.