Dollar index at its highest level in 20 years

Arguments for further interest rate hikes in the US and the fear of a slowdown in global GDP growth may strengthen the US dollar. USD index rose above 104 points on Monday, reaching the highest level in 20 years.

Rising inflation, Russia's invasion of Ukraine, covid restrictions in China, concerns about economic development, the specter of stagflation - these factors may generate demand for the US dollar. In an atmosphere of global uncertainty, the USD plays the role of a safe haven and attracts capital.

Will the next raise be bigger?

Another factor driving the performance of the US currency may be expectations regarding interest rate hikes in the US. It is worth recalling that last week Federal Reserve raised the interest rate by 50 basis points.

The employment report published later could strengthen investors' conviction that the Fed will decide on further hikes. The data surprised positively - the American economy added 428 (except for agriculture) last month. new jobs, while market expectations were about 400 thousand. posts.

Employment thus seems to be returning to pre-pandemic levels, and the good condition of the US labor market may prompt the Fed to make more bold moves to fight inflation. Including therefore the futures markets are pricing in that at the next meeting (in June) the central bank will announce an increase by 75 basis points, and by the end of this year interest rates in the US will rise by over 200 points.

When will the stock markets stop losing and the dollar stop gaining?

Nasdaq 100 index since the beginning of the year, it has lost over 23%, which may correlate with a strong increase in prices. While inflation has risen, stock indices have historically tended to decline, reaching their lows when inflation peaked.

On Wednesday, the data on US inflation in April will be released. Investors can look for an announcement of the end of stock market declines. The possibility of reaching a peak in inflation may also cool down expectations of higher than currently expected interest rate hikes. This, in turn, may translate into USD quotations and investor attractiveness.

One of the market measures of expectations about the level of US interest rates, i.e. the yield on 10-year treasury bonds, increased today to 3,15%, and market expectations based on the federal funds rate contracts indicate that the peak of the rate hikes cycle will reach 3,5 , 3,75-XNUMX percent Thus, the market may be close to the full discount of the monetary tightening in the US in the current cycle, which may mean that the space for a possible further strengthening of the USD seems to be narrowing.