The US dollar firmed up on Monday, holding near its highest levels since early March as the Federal Reserve maintained a hawkish outlook on monetary policy due to persistently high inflation.
The dollar index, which measures the greenback against a basket of six major currencies, rose 0.5% to 105.6. The index is up over 18% so far this year, making it one of the best-performing assets in the world.
The Federal Reserve kept interest rates unchanged at its September policy meeting but signaled another rate hike before the end of the year and fewer rate cuts than previously indicated next year. The Fed’s hawkish stance is underpinned by its commitment to bringing inflation back down to its 2% target.
Data released on Friday also showed that US service sector growth eased to an eight-month low and manufacturing output continued to contract due to high borrowing costs. The data suggests that the US economy is slowing down, but it is also a sign that the Fed’s rate hikes are having the intended effect of curbing inflation.
In recent sessions, the dollar has strengthened the most against the Japanese yen as the Bank of Japan remained committed to ultra-easy monetary policy. The yen has lost over 20% against the dollar so far this year, making it the worst-performing major currency.
The greenback has also continued to appreciate against antipodean currencies as risk-off sentiment pervaded markets. The Australian dollar and New Zealand dollar fell over 1% against the US dollar on Monday.
The dollar’s strength against antipodean currencies is particularly noteworthy, as these currencies are typically seen as bellwethers for global economic growth. The fact that they are underperforming the dollar suggests that investors are becoming increasingly concerned about a global economic slowdown.
The dollar’s strength is also likely to put further pressure on emerging markets, as many of these countries have significant debt denominated in US dollars. A stronger dollar makes it more expensive for emerging markets to repay their debt, and it can also lead to capital outflows.
Overall, the dollar’s strength is a reflection of the Federal Reserve’s hawkish stance and the market’s growing concerns about a global economic slowdown. Investors are likely to continue to favor the dollar in the coming months, particularly if the Fed continues to raise interest rates.