Is the US Dollar Awaiting a Strong Rise?

The dollar rose in early European trade on Monday, extending gains from the previous session after strong inflation numbers reinforced monetary policy tightening at this week’s Federal Reserve meeting.

The dollar index, which measures the greenback against a basket of six other currencies, was up 0.1% at 94.243, just below Friday’s peak of 94.302, a level not seen. Since October 13.

It comes after data on Friday showed that the Fed’s preferred measure of inflation, the core personal consumption expenditures index, rose at an annual rate of 4.4% in September, the fastest since 1991.

The central bank holds a two-day policy meeting this week, concluding on Wednesday, after which it is widely expected to announce a reduction in stimulus. However, these persistent inflationary pressures have reinforced market expectations that the Fed will start raising interest rates earlier than previously directed.

While influential investment bank Goldman Sachs responded by submitting its one-year forecast to July 2022 for the first-rate hike in the US after the pandemic.

USDJPY traded 0.3% higher at 114.33, just below its strongest level since October 20, after Japanese Prime Minister Fumio Kishida’s ruling Liberal Democratic Party defied expectations and maintained its strong majority in Sunday’s parliamentary elections. This may mean that he now has the leeway to push through more stimulus to boost the beleaguered economy, at the cost of the yen.

EURUSD also fell 0.1% to 1.1553, only marginally higher than Friday’s low of 1.1535, the weakest since Oct. 13, which followed Thursday’s European Central Bank meeting.

While GBPUSD fell 0.2% to 1.3659 ahead of the Bank of England meeting on Thursday, which could see the central bank raise interest rates if it sees the country’s economy is strong enough to handle spiraling inflation.

While the country’s central bank is under pressure to abandon its commitment to maintaining target bond yields for April 2024 at 0.1% as house prices rise. It chose not to defend the 0.1% target for three-year bond yields, late last week, which subsequently rose to more than 0.8%.