Dollar Hits Pre-Pandemic Highs, But Peak Fed Hawkishness May Limit Gains
By Yasin Ebrahim
Investing.com – The dollar has ripped and roared its way to highest level since the pandemic began on a diet of Federal Reserve hawkishness, but the world’s reserve currency could soon run of steam as much of the rate hikes have been priced in.
The U.S. dollar index, which measures the greenback against a trade-weighted basket of six major currencies, rose by 0.65% to 102.99, to its highest level since March of 2020.
“The strong dollar cycle is looking long in the tooth,” ANZ said in a note, according to Forexlive, as a lot of rate hikes “have already been priced in.”
Bets on an aggressive path of the Fed tightening were given a further boost last week after Fed Chairman Jerome Powell all but confirmed that the central bank would be hiking rates by 50 basis points in May.
“I would say that 50 basis points will be on the table for the May meeting,” Powell said last week.
Traders are currently pricing in the Fed to hike rates by 50 basis points at each of the next three meetings as the central bank attempts to rein in inflation that is running well above its 2% target.
The hawkish remarks from Powell and other Fed members have stoked speculation on whether the central bank will hint that a much larger 75 basis point will be considered.
“The post-meeting statement and Chair Powell’s press conference remarks will likely keep the door open to 75bp hikes, but we believe it is too early for an explicit endorsement,” Nomura said in a note ahead of the Fed’s meeting next week.
Still, some believe that most of the Fed hawkishness is close to being fully priced in, leaving the dollar vulnerable to a rocky road ahead.
“We may not have reached peak Fed hawkishness, but we must be getting close,” ANZ added. “[T]he DXY (dollar index) is overvalued based on our fair value estimate,” ANZ notes.