Intensifying indications in November of a more hawkish monetary policy by major central banks caused herds of investors to take a break from risky currencies. The speedy transmission of the Omicron variant has also contributed to the market chaos. According to the analyst website TradingEconomics.com, the US dollar traded higher than 96.6 on Friday. It was close enough to a 3-week high of 96.87 from November 24th.
Investors were gradually settling into the fact of imminent US rate hikes in 2022, even as the Federal Reserve bank signalled three interest rate hikes once the year has run its course.
In truth, the risk of Omicron infection is five times higher than Delta’s, even if it shows no signs of being milder. Being the biggest economy in the world, events in the US have a significant impact on all other world currencies.
Since the end of the gold standard in 1971, the US dollar or USD has been the world’s reserve currency. When the dollar goes up, your country’s currency promptly heads south. A good example was in 2018 when the USD strengthened, and the Euro scored significant losses all through that year. Yet, this does not always happen.
Being the world’s reserve currency means the US dollar is, by default, the most traded currency in the world. The Bank of International Settlements reports that the USD accounted for 88½ per cent of all daily forex transactions as of 2019.
In order to understand the movements of the US Dollar in 2022, it’s essential to understand what’s driving its rate in 2021.
Analysing the USD’s Current Performance
The dollar closely mirrors developments in the US economy. It is a safe have currency, with investors always looking to favour the US in a risk-off climate. For instance, the pandemic has enabled the USD to post a string of gains this year as the global economy groaned under the weight of the disease.
Besides, the dollar is a beneficiary of its own gains.
Higher vaccinations for COVID indicate a more robust economic outlook at home. A struggling Chinese property sector has left investors rattled and reaching for the US dollar.
Forecasting the USD
A robust economic growth path helps the US dollar rise since it is the world’s reserve currency.
The outlook for the dollar in 2022 is positive. In the absence of events capable of rocking the global economy, Fed policies may bolster sentiments around the US economy.
Citibank analysts expect a bullish run for the US dollar against all currencies. It includes the British Pound and the Euro. There might also be further rate hikes by the Feds, which the analysts expect to move higher faster and further than markets are pricing or Fed dots can fully indicate.
The dollar is forecast to solidify its case against the Euro. ING expects the EUR/USD exchange rate to have hit 1.16 by the end of 2021 and fallen to 1.10 by the end of 2022.
According to ING, the pound will also concede ground to the dollar over 2022. The exchange rate is likely to fall from 1.36 at the end of 2021 to 1.34 at the end of 2022.
The dollar will mostly tread on higher ground against other world currencies.
Note: Please do not invest money or assets in the financial markets that you cannot afford to lose. This article should not be construed to be investment advice and is for information purposes only.