The US dollar has remained relatively stable over the past week with the US Dollar Index (DXY) continuing to trade close to year-to-date highs at just below the 110.00 level. Fed’s hawkish inflation message continues to favour a strong USD, economists at MUFG Bank report.

Fed strikes hawkish tone

“While the pace of tightening is likely to slow as the Fed continues to tighten policy, Fed Chair Powell emphasized that restoring price stability will require restrictive policy for some time. Lessons from the 1970’s and 1980’’s highlighted that central banks can and should take responsibility for delivering low and stable inflation.”

“Another important lesson was for central banks to keep at it until the job is done. The need to maintain tighter policy for some time pushes back further against market expectations for a dovish pivot from the Fed in the year ahead. The US rate market has been scaling back expectations for rate cuts from the Fed as early as next year.” 

“Overall, the hawkish message from Fed Chair Powell should continue to support a strong US dollar.”