Over the course of the last trading week, the U.S. Dollar Index (DX), which measures the world’s largest reserve currency against a host of six major global currencies, rose by nearly 1.7%. This important measure of the American dollar’s strength hasn’t reached such levels since early July of 2020. The Pound sterling and the euro also declined over the last trading week against the Dollar, by 1% and 1.7% respectively. So what factors have led to this increase in the greenback’s strength?
Central Bank Decisions
The United States’ central bank captured headlines this week, but market watchers may be waiting with bated breath for decisions coming out of London, Sydney, and Frankfurt in the coming days.
The Reserve Bank of Australia (RBA) is set to hold a meeting regarding monetary policy on Tuesday, February 1st. This will be followed by a statement on monetary policy this coming Friday. The RBA is expected by many policy experts to be gearing up for a similarly hawkish turn, consisting of an end to its $4 billion AUD-a-week bond-purchasing program. However, despite rising inflation, some are predicting that the bank’s governing board will not move toward a rise in interest rates until later in the year, if not 2023. The AUD/USD was trading up by 0.7% as of Monday morning, but an interest rate hike in the U.S. in tandem with a low cash rate in Australia could keep it down.
On the Old Continent, the European Central Bank and the Bank of England seem to be diverging in their policy directions. The UK’s Bank of England could very well be on track to instituting the nation’s second interest rate hike in two months, the first time this has occurred in eighteen years. If the BoE takes this path following its Thursday meeting, it could help in combating the UK’s thirty-year high in inflation. Furthermore, the GBP/USD, up 0.2% at just over $1.34 as of the time of this writing, could be boosted by a further increase in British interest rates.
On the other hand, The impact of Fed’s decision on different asset classes
Equities: The three main Wall Street indices reversed gains overnight after the Fed’s announcements. Tremors were felt in Asian shares, which hit nearly 15-month lows. European markets also dropped with cuts of 1-1.5 percent.
Bonds: It is said that bond markets and short-term rates are the first to gauge the change in the central bank’s monetary policy. Rising expectations of a hike in key rates impacts short-term yields. The two-year yield jumped to a 23-month high and the 10-year yield climbed near 1.84 percent.