Saqib Iqbal Ahmad

NEW YORK (Reuters] – Rising inflation and increased expectations for a Federal Reserve that is more hawkish are driving a surge in the U.S. currency. It has risen to a nearly 16-month high in comparison with its peers, and it’s on pace for its highest annual gain since 2006.

The U.S. Dollar Currency Index rose 0.3% Monday to 95.437. This is its highest level since July 2020.

Graphic: Dollar rebound https://fingfx.thomsonreuters.com/gfx/mkt/jnvwexlwkvw/Pasted%20image%201636749775572.png

HSBC and Citi banks (NYSE:) forecasted more gains in the greenback over the past few days as Wall Street tries to gauge whether higher inflation will cause the Fed and Fed to increase their rate-raising efforts and accelerate its bond buying program.

We take a look at what factors are behind the rise of the dollar.

Graphic: Inflation and real yield advantage https://fingfx.thomsonreuters.com/gfx/mkt/gdpzydkxavw/Pasted%20image%201636727898037.png

INFLATION

The Fed has been able to control inflation more vigorously than anticipated in recent months. This supports the argument that they will need to do more to curb rising consumer prices. Some dollar-denominated assets like Treasuries are more appealing to yield-seeking investors because of higher U.S. interest rates.

U.S. Dollar Currency Index climbed nearly 1% last week, the biggest one-day movement in almost five months. This was after data revealed that U.S. consumer prices saw their largest annual gain in 31 year last month.

Joe Manimbo is a senior market analyst. “The Dollar may be beginning to show signs of an uptrend, if inflation rises. The Fed will need to end its bond buying program. Western Union Business Solutions.

The has appreciated at the start of the last four of the Fed’s hiking cycles, with a mean gain of 3.1% in the first seven months, economists at Citi noted in a recent report. As inflation pressures rise, the bank anticipates that the Fed will accelerate the dewinding of its $120 million a month bond-buying program in January.

UBS Global Wealth Management analysts believe that a more hawkish Fed monetary policy could see the euro rise to $1.10 at the end 2022 from $1.14 Monday.

Graphic: Bullish on the buck https://fingfx.thomsonreuters.com/gfx/mkt/zdpxonqmkvx/MicrosoftTeams-image%20(15).png

BULLISH BETS

According to calculations made by Reuters, and U.S. Commodity Futures Trading Commission data, net bullish positions in the dollar futures market have declined in recent weeks. However, at $19.51 trillion they remain close to recent highs. They went from being bearish in mid July, flipping back in November, when they were near their previous highs.

BofA Global Research recently saw its Bull-Bear Index to view and exposure, which measures fund managers’ reactions on FX surveys. This is a sign of bullishness about the U.S. currency.

BofA Global Research analysts stated that the recent moderated index is expected to be recalculated after receiving latest inflation data.

The strategists stated that “Positioning has not been stretched here but unwound 2020 shorts.”

Graphic: Dollar dominance https://graphics.reuters.com/USA-MARKETS/DOLLAR/byprjkmqzpe/chart.png

EMERGING MARKKETS

Strong dollar may be a problem for emerging markets. This can lead to higher interest rates for countries that have debt in U.S. dollars.

The US dollar rose 35% this year against the Turkish Lira, while the Brazilian Real gained 5%. On pace to record its lowest annual gain for three years, the MSCI Emerging Market Currency Index has increased 0.9%.

The lira fell to an all-time low of 1.2 percent against the dollar on Monday as worries about a further rate cut by the central bank continued to weigh down the currency.

“The Fed is starting to tighten monetary policy, worries around China and the pandemic persist, and many emerging markets won’t be able to keep up with the sound growth outlook for developed markets,” Tilmann Kolb, analyst at UBS Global Wealth Management said in a note last week. We believe this will lead to more weakness in the U.S. dollar.”

Graphic: boom https://fingfx.thomsonreuters.com/gfx/mkt/znvneklwqpl/Pasted%20image%201636727507803.png

BITCOIN BOOM

Other assets such as oil and metal have been attracted by inflation fears. Analysts believe that they are also responsible for the rise of bitcoin which reached a new record in January. By market capitalization, bitcoin is the largest currency in the world and has risen 120% to 2021.