The dollar index rose to the highest level in about a year Wednesday, with currency traders attributing the climb partly to investors factoring the prospect of higher benchmark interest rates, following the Federal Reserve’s important policy update a week ago.
The U.S. Dollar Index
DXY,
hit an intra-session peak at 94.28 during New York trading, a level last seen in September and November of 2020. It has taken almost a full week for the round-the-clock currency market to react to the Fed’s Sept. 22 update, which includes the likelihood of pulling back soon on the monthly purchases of $120 billion in debt, as well as the possibility of an earlier-than-expected rate increase in 2022.
Financial markets, as a whole, have seen a delayed reaction to the Fed’s policy update last week, as investors weigh the idea of the central bank shifting away from extraordinarily easy settings and the notion that inflation may be longer lived than some had anticipated.
The bond market was largely muted on Sept. 22—with traders initially skeptical that the Fed could increase rates as quickly as projections indicate — before finally selling off and pushing yields to the highest levels in months on Tuesday. The recent climb in Treasury yields was blamed for a U.S. stock selloff on Monday and Tuesday, which left the S&P 500 index SPX and the Nasdaq Composite Index COMP trying to recover on Wednesday.
“People are suddenly waking up to the risk that the Fed will have to tighten policy faster than expected, and that process isn’t going to stop here because of possible spillover to other countries as the U.S. dollar rises,” said Derek Tang, an economist at Monetary Policy Analytics in Washington.
“The Fed might have to play catch up because it might have to hike more to offset inflation,” Tang said via phone. “And by the time the first hike happens, the economy will be roaring and the Fed will be further behind the curve.”
