The US dollar (USD) has strengthened against most of the major currencies since the Russian invasion of Ukraine, reaching an almost 20-year high in mid-May before easing slightly lower.
The dollar index (DXY), a measure of the currency’s strength against a basket of rival currencies, including the euro (EUR), Japanese yen (JPY) and British pound (GBP), at the time of writing (7 June) stood at 102.60 – up 6% from the start of the year but down marginally from the 104.76 reached in May, its highest level since 2002.
A challenging geopolitical situation and an inflationary economy have seen investors move to the safe haven of the dollar. In contrast, the euro’s status has been knocked back by its closeness to the conflict, while the yen has dropped due to loose Japanese monetary policy.
Will these tailwinds continue to lift the buck further in 2022? Read on for the latest USD news and a dollar price prediction.
US dollar performance so far this year
After steadily climbing throughout 2021, the DXY saw a solid start to 2022. The US dollar index has rallied from a low point of 94.63 in mid-January to a high of 104.76 on 13 May – a level that was last seen in December 2002. Since then, the price eased slightly and currently trades 2% off that high.
David Jones, chief market strategist at Capital.com, commenting on the USD’s performance said:
What has been driving the US dollar higher in 2022?
Inflation has been a key concern for the market across the year and looks set to remain one going forward.
Supply chain bottlenecks meant the supply-demand mismatch that began as economies emerged from lockdown continued, boosting prices. This was amplified by China’s two-month lockdown in Shanghai, from April to June. A shortage of workers post-pandemic also raised wages. With over 11 million job vacancies in the US, the labour market remains tight, and employers are raising wages to attract staff.
According to the US Bureau of Labor Statistics, inflation, as measured by the consumer price index (CPI), jumped to 8.5% for March year-over-year (YoY), a 40-year high. In April, the CPI slowed slightly to 8.3%. Core CPI, which removes more volatile items, fell to 6.2%. The data has raised hopes that peak inflation may have passed. It is still early days, and investors will closely watch CPI data in June to confirm that inflation is heading lower, albeit very slowly.
Economic growth has been disappointing, with Q1 gross domestic product (GDP) showing a deeper than initially expected contraction of -1.5%. Still, growth is expected to rebound in Q2 by 4%, according to analysts at ING, thanks to solid consumer spending.
While growth stalled, the US labour market has shown resilience, with solid job creation even as fears of surging inflation and an aggressively acting Fed rose. The May non-farm payroll report showed that 390,000 jobs were added to the US economy, significantly above the 318,000 forecast. The unemployment rate held steady at 3.6%, a pre-pandemic low. The figures confirmed the US labour market recovery was making solid progress.
In light of rising inflation, a strong labour market and slowing growth, the market questions how aggressively the Fed could hike interest rates. There was a 25 basis-point (bp) hike in March and a 50bp hike in May. As of 7 June, the Fed was broadly expected to hike rates by another 50bp in June and July.
While the prospect of a very hawkish Federal Reserve lifted the USD initially, concerns over whether the Fed can continue hiking rates so aggressively in Q3 and beyond have pulled the USD exchange rate off its 20-year high. The main fear is that if monetary policy is tightened too fast, it could tip the US into recession, although in recent sessions this fear has eased, helping US dollar index higher.
On 24 February, Russia invaded Ukraine, which rattled the financial markets. The USD rose on safe-haven flows. After 100 days of war, the foreign exchange (FX) market is less sensitive to Russia and Ukraine headlines, suggesting that the safe-haven trade has been unwinding.
However, commodity prices, mainly oil prices, have remained elevated after the recent approval of a phased-in ban by the EU on Russian oil. High oil prices are helping keep inflation elevated and are slowing the Fed’s ability to rein in inflation.
Soaring energy prices not only drive inflation higher but are expected to slow global growth. According to the International Monetary Fund (IMF), the Ukraine crisis could shave 1% off global growth. Rising inflation and slowing growth, or stagflation, put central banks such as the Fed in a very difficult position.
What is your sentiment on DXY?
What is the outlook for the USD?
Despite an already strong year in 2022, will the USD strengthen further?
Piero Cingari, an analyst at Capital.com, commenting on US dollar trends, said:
As of 6 June, analysts at ING bank, in their US dollar rate forecast, saw the US dollar index rising:
Analysts at HSBC were also bullish in their USD future prediction, agreeing that “the market has priced in a lot of tightening by the Fed this year; but the fact that the Fed has a greater ability to deliver on the hikes that are priced in compared to many other central banks should keep the USD in a strong position.”
They added: “we believe global growth risks skewed to the downside should also support the USD.”
EUR to USD forecast
The EUR/USD fell to a seven-year low owing to the region’s vulnerability to the Ukraine crisis. Europe is very dependent on Russian energy. Supply fears following the EU’s ban on Russian oil imports sent prices across the energy complex higher, contributing to concerns about inflation and stagflation.
However, more recently, and with inflation at a record 8.1%, the European Central Bank (ECB) has adopted a more hawkish stance towards monetary policy, hinting at a rate hike in July and another in September. Previously, the ECB wasn’t considering hiking rates until next year. The more hawkish outlook has lifted the euro towards 1.07.
Analysts at ING bank said in their future euro to dollar value prediction:
GBP to USD forecast
The pound sterling has fallen versus the US dollar in recent weeks amid growing concerns over the health of the UK economy. Growth stalled at the end of Q1, fueling doubts over how far the Bank of England (BoE) could raise interest rates without tipping the UK economy into recession.
The BoE has already hiked interest rates over the past four meetings. It could raise rates again in June, but the risks remain to the downside. According to analysts at ING in their pound to dollar forecast “there remains a lot of bearishness surrounding sterling. The argument goes that hiking rates in a softening economy is a sterling negative.”
Fiona Cincotta, senior market analyst at City Index, in her GBP to USD projections, believed the pound could fall further too. In her GBP/USD technical analysis she considered that a meaningful break below 1.25 could see GBP/USD extend its decline towards 1.23 -1.2350 in the coming weeks.
Note that analysts’ forecasts can be wrong. Forecasts shouldn’t be used as a substitute for your research. Always conduct your own due diligence before investing. And never invest or trade money you cannot afford to lose.
Will USD rise or fall?
The USD is being supported by several tailwinds after the Russia invasion of Ukraine, 40-year high inflation and a Fed that could continue hiking rates aggressively.
What determines the value of the dollar?
The dollar’s performance is principally determined by the Federal Reserve monetary policy stance. If the Fed hikes interest rates, the USD is expected to rise. If it cuts rates, the USD market could fall. Other factors such as safe-haven inflows or outflows can also influence the value of the US dollar.
Why is the USD getting stronger?
The US dollar is strong because it is the world’s reserve currency and one that investors seek out in times of geopolitical instability. Furthermore, with inflation at a 40-year high, the Fed is expected to tighten monetary policy quickly.
Why is the USD going up?
The USD is going up because the Federal Reserve is expected to raise interest rates at a rapid pace in order to bring inflation back towards its 2% target. The US economy is broadly expected to withstand the faster pace of rate hikes.