The US dollar rose to its highest level in six months on Friday, as investors adjusted to the prospect of higher interest rates in the world’s largest economy. The greenback gained against the euro, the pound, and the yen, while US stocks and bonds fell.
The dollar’s rally was driven by the signals from the Federal Reserve that it would start raising interest rates next year to combat inflation. The Fed announced on Wednesday that it would begin tapering its bond-buying program in November, and indicated that it could hike rates three times in 2022.
The Fed’s hawkish stance contrasted with the more cautious approach of other major central banks, such as the European Central Bank and the Bank of Japan, which have kept their monetary policies loose. This widened the interest rate differential between the US and other countries, making the dollar more attractive for investors.
Dollar Index Hits 94.5
The dollar index, which measures the greenback against a basket of six major currencies, rose to 94.5 on Friday, its highest level since March. The index has gained about 4% since August, when it was trading around 90.
The dollar also reached a six-month high against the euro, which fell to 1.17 on Friday. The euro was weighed down by the political uncertainty in Germany, where the outcome of the recent election remains unclear. The eurozone’s economic recovery also lagged behind that of the US, as the region faced supply chain disruptions and energy shortages.
The dollar also climbed to a six-month high against the pound, which dropped to 1.36 on Friday. The pound was hurt by the rising COVID-19 cases in the UK, which raised doubts about the sustainability of the country’s reopening. The UK also faced a severe energy crisis, which threatened to push up inflation and hurt growth.
The dollar also advanced to a six-month high against the yen, which slid to 110.8 on Friday. The yen was weakened by the lackluster performance of Japan’s economy, which contracted in the second quarter. Japan also had a leadership change this week, as Prime Minister Yoshihide Suga stepped down and was replaced by Fumio Kishida.
US Stocks and Bonds Fall
The dollar’s strength came at the expense of US stocks and bonds, which declined on Friday. The S&P 500 index fell by 0.9%, while the Nasdaq Composite index dropped by 1.4%. The Dow Jones Industrial Average index also lost 0.7%.
The US stock market was pressured by the rising interest rate expectations, which reduced the appeal of growth-oriented sectors such as technology and consumer discretionary. The market was also rattled by the uncertainty over the US debt ceiling, which could lead to a default if Congress fails to raise it by mid-October.
The US bond market also suffered from the higher interest rate outlook, which lowered the prices of fixed-income securities. The yield on the 10-year Treasury note rose to 1.48% on Friday, its highest level since June. The yield on the 30-year Treasury bond also increased to 2.01%, its highest level since July.
Outlook for Dollar Remains Bullish
Analysts expect the dollar to maintain its upward momentum in the coming months, as the Fed continues to tighten its monetary policy while other central banks lag behind. The dollar could also benefit from its safe-haven status, as investors seek refuge from the global risks such as COVID-19 variants, geopolitical tensions, and environmental disasters.
However, some factors could limit the dollar’s gains, such as a possible slowdown in the US economic growth due to the Delta variant, a potential fiscal stimulus package from Congress, or a resolution of the debt ceiling issue. The dollar could also face some headwinds from a rebound in commodity prices, which could boost the currencies of resource-exporting countries such as Canada and Australia.
