US Dollar, what is driving it higher in 2022?

  • 2022-05-20 08:34:07
  • 5 min read
Us Dollar

Following a gradual increase throughout 2021, the US dollar index (DXY) is witnessing a strong rise in 2022. The DXY, which measures the USD against a moving basket of six major currencies moved upward from 94.63 in Jan to a record high of 99.40 second week of March, last seen mid-pandemic (May 2020).

2022 started with several major concerns and Inflation was among the top ones. It jumped to 7.9% year-on-year in February, a new 40-year high and significantly above January’s 7.5% reading (US Bureau of Labour Statistics). This jump was mainly caused by the supply-demand mismatch which continued long after economies started to emerge from lockdowns, raising both prices and wages. With over 11 million job vacancies in the US, beginning of 2022, employers had to raise wages to attract staff.

While inflation surged and the employment market continued to recover, the overall impact of Covid-19 on the economy became much smaller than initially anticipated. The question remains to what extent would the Fed increase interest rates, knowing that the prospect of an aggressive Fed decision will keep boosting the USD.

A few weeks ago, the Russian invasion of Ukraine disrupted the whole financial market with the US S&P 500 losing 5% in just two weeks and commodity prices surging higher due to supply fears, lifting inflation expectations even higher. The rise in oil prices however has been the biggest fear for all markets with prices jumping over 20% in two weeks due to the US sanctions on Russian oil imports which fueled supply fears in an already tight market.

While rising energy prices are expected to slow global economic growth, the Feds are in a very difficult position as they will unlikely to increase interest rates to the anticipated levels due to fear of driving the US economy into recession.

The big question remains, with a strong 2021 and a very eventful beginning of 2022, is the USD heading to unprecedented levels?

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