US Dollar Stays Strong as Markets Await Fed’s Policy Forecasts
Aiswarya Gopan • 2 min read
Ahead of the Fed announcing possible clues on when it could begin tightening its monetary policy, the US dollar is trading close to the highest levels seen since a month against its major peers. At the time of writing, the US dollar index DXY is trading around 93.27.
At the beginning of the week, the dollar index had touched a one-month high, powered by a risk-off sentiment in global financial markets as well as increasing expectations for a possible timeline by when the Fed could start easing back on stimulus efforts. In early trading on Wednesday, it is holding just under this level, as investors cautiously await the outcome of the latest Fed meeting.
The Fed is likely to unveil its future path for monetary policies, which will be closely watched for any clues on when it could begin tapering asset purchases and consider the first rate hike since the start of the pandemic. Strong economic data releases could convince the Fed to start tapering its monthly bond purchases by as soon as November, and an announcement of such a plan could drive more bulls towards the reserve currency.
In addition, the Fed’s dot plot will also be in focus for hints on when markets could see the US central bank hikes rates again. Comments from Fed Chair Powell will also be monitored for any hints on when he would consider increasing interest rates from the current record lows as the US economy starts recovering from the pandemic-driven crisis.
Meanwhile, the risk sentiment still provides support to the safe haven appeal of the greenback over mounting worries that China’s leading property developer, Evergrande, could default on its mountain of debt. With the deadline approaching, investors worry that the company may not be able to pay over $83 million in interest on its March 2022 bond. A failure to do so could have a spillover effect on global equity markets, which could further strengthen the US dollar as a safe haven instrument.