Saqib Iqbal Ahmad

NEW YORK (Reuters), Despite the dollar’s rocky start, some investors still believe that it will continue its climb higher thanks to a hawkish Federal Reserve.

While the dollar remains flat over the past year, this hides the volatile ride that saw the greenback swing between gains and losses as investors reassessed how tightened monetary policy the Fed would be in the future. Comparatively to a basket currencies, the dollar rose 5% in the past year.

According to investors, where the dollar will go from here is determined partly by real yields. This refers to what holders of U.S. Government Bonds expects in inflation adjusted returns. These have been in decline in recent days following a surge last month.

Rising real yields tend to boost the dollar’s allure to investors and have been a source of support for the greenback in the past. They have fallen from recent highs, but some bet real yields would continue to rise in months ahead, provided the Fed continues its hawkish position, which will push the dollar higher.

John Velis (NYSE:), FX strategist and macro strategist for BNY Mellon, stated that real rates have driven the dollar since the pandemic.

After touching an all-time high of -0.539% Jan. 26, the yield on 10-year Treasury Inflation Protected Securities (TIPS), was recently at -0.66%. Fed Funds futures are currently priced at a total rise of 118 base points for the year-end.

GRAPHIC: The real deal, https://fingfx.thomsonreuters.com/gfx/mkt/dwpkrjaegvm/Pasted%20image%201643643093925.png A rising dollar has far-reaching implications for everything from corporate earnings to the fight against inflation. Stronger dollars allow American citizens to access cheaper goods and services from abroad, while it also affects the profits of American businesses who rely heavily on foreign markets.

Nearly two thirds of strategists polled last month by Reuters said that interest rate differentials will dictate sentiment in FX markets majors in the short term.

Most currencies will not be able gain against the dollar within the coming months. However, the Fed’s expected tightening of monetary policy will help the greenback maintain its lead well into 2022 according to Reuters strategists.

Thanos Bardas (senior portfolio manager, Neuberger Berman) expects the yield of 10-year TIPS will rise to 0% from an average of just -1% in the 18 month prior.

Bardas explained that “the dollar usually rallies against other currencies during this adjustment.”

Bardas, like other investors, is also watching the difference between the yields in the United States and those in other major economies to get a clue on the dollar’s direction.

The U.S.-German 10-year government bond real returns were at about 115bps in dollar’s favor on Wednesday. It was the largest gap since March 2020.

The yield advantage might shrink if Bank of Japan and the European Central Bank accelerate inflation control efforts.

According to economists polled mid-January by Reuters, the Eurozone inflation will heat up faster than anticipated in 2022, according to Reuters. This could put pressure on the European Central Bank, who may tighten its policy after the Omicron wave is over.

Analysts Morgan Stanley According to the NYSE, the Dollar will continue to rise against the Japanese Yuan. This is due in part because of expectations that Bank of Japan would be more dovish than other central banks.

According to a report by the Fed last week, while the greenback is unlikely to gain ground against major currencies, other central banks will need to tighten their monetary policies in line with the Fed’s.

Chuck Tomes (portfolio manager, Manulife Investment Management Boston) said: “Global growth could help these local currencies if there are continuing reopening plans.”

Tomes has kept portfolios safe from a dollar rise since the second quarter of 2021. However, Tomes isn’t letting go.

He stated that although the U.S. real rate is not yet very attractive, they are steadily rising and there’s a good chance they will get even more attractive.