The US inflation is at a four-decade high, while the US Dollar Index is at a 2-decade high, with rising inflation and expectations of another rate hike.
US Dollar Index Hits 20-Year High
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A risk-averse situation keeps the Dollar moving ahead. The hawkish attitude of the Fed pushes the US Dollar higher. The greenback is at a 20-year high as the DXY moved past 105 levels against a basket of currencies.
The US Dollar Index was above 105 levels during trading hours on Tuesday, June 14. Fear of an economic slowdown drives the safe-haven USD higher. The Fed is expected to increase interest rates to curb inflation and revive the economy, another reason for the rise in the Dollar.
The US Dollar Index surged past the levels of 105.06 reached on May 13. The DXY is at105.222 during trading hours on Tuesday, June 14.
High Inflation Brings US Dollar Index to 2-Decade High
The US economy hit by high inflation is in danger of an economic slowdown. The DXY moved past 105 on May 13 but slid lower to 101.30 in the last week of May. It June, the DXY trades at a 2-decade high at 105.222. Despite the rate hike decision taken by the Fed, inflation continues to remain high in the US. 10-year Treasury yields are at a decade high, strengthening the US Dollar Index. Moreover, the US Dollar is gaining value as a safe-haven currency amid the falling value of major currencies across the globe. Inflation is at a two-decade high of 8.6% in May.
Central banks of many countries have increased interest rates as a money tightening measure to curb inflation. The CPI shows that prices may continue to grow in the days to come. The Fed has taken aggressive steps to tighten monetary policy. Experts predict that the Fed may hike rates again to bring down inflation and tame high prices.
Inflation at 8.6% in May is the chief concern of the Fed. Inflation is at a 41-year high. Policymakers react aggressively to tackle escalating commodity prices. If inflation persists, the economy may face a severe recession. Economists acknowledge that inflation erodes the purchasing power of consumers. Businesses are affected by rising prices, and high household expenses add to the burden of the people.
CPI month on month has increased by 1% in May. The Ukraine war has brought in supply chain restrictions that curb the supply of energy and food grains, causing an increase in prices.
The Fed has hiked interest rates in March by 25 bps and in May by 50 bps. The Fed, perturbed by high inflation, may hike rates again by 75 bps. Federal Reserve Chairman Jerome Powell faces a grim situation where inflation is the culprit that keeps economic growth lower.
Crude prices are increasing, leading to an increase in inflation. The prices of food, gas and other consumer goods increased in May. American households are under heavy pressure with rising costs.
Food prices have soared, leading to forty-year high inflation in the US. The Fed is expected to hike interest rates to combat inflation in the September meeting too. Inflation is at levels last seen in 1981, forcing the Fed to increase rates aggressively.
High inflation keeps the US Treasury notes high. The 10-year Treasury notes are at a decade high as investors seek government bonds with inflation running hot. US equity markets continue to tumble with higher yields.
The strengthening US Dollar value may affect the US multinational companies negatively. The rise in the US Dollar index may hit companies that have businesses across the globe.
Economic Activities in the US
Construction spending month-on-month has come down from 0.3% to 0.2%, month on month. Manufacturing activities have come down from 84.6 to 82.2, caused by high inflation. Vehicles sales have fallen from 14.3 million to 12.7 million, indicating rising expenses for durable goods and slowing consumer confidence.
Private sector employment availability has dropped from 202k to 128k, much below the expected level at 295k. It is an indication of a slowing economy and lower job growth. Factory orders month-on-month dropped from 1.8% to 0.3% in May.
However, unemployment claims have come down from 211k to 200k, which indicates that the number of individuals filing for unemployment insurance has dropped.
Non-farm employment change dropped from 436k to 390k in May as the overall economic activities in the US are under the pressure of high inflation. The unemployment rate remains the same at 3.6%.
Major Currency Pair Price Predictions
The EUR/USD has weakened to 1.0420 levels. Unless it takes support at 1.0353 levels, the Euro may come under further downward pressure.
The British Pound to US Dollar Index is at 1.1993 and has strong support at 1.1950 levels. The GBP/USD is at the levels last found in March 2020.
The US Dollar to Japanese Yen has weakened to 134.88. The Japanese Yen is at levels last found in 2002, and moving with a downward trajectory.