The US dollar strengthened its position in the currency markets on Wednesday, with the dollar index reaching 102.5 points, its highest level in nearly a month. This advance came after a 0.5% rise in the previous session, amid growing expectations of further interest-rate hikes from the Federal Reserve (Fed).
Monetary-tightening expectations support the dollar
The rise in the dollar is mainly explained by investors’ expectations regarding the evolution of the Fed’s monetary policy.
Inflation figures running above forecasts, coupled with statements favorable to a tighter monetary policy by several central-bank officials, have strengthened the prospect of additional rate increases in the coming months.
In this context, Federal Reserve Governor Christopher Waller said that a 50-basis-point increase in December could be necessary.
Meanwhile, Dallas Fed President Lorie Logan has advocated for at least two more 25-basis-point hikes.
Markets expect further rate hikes
Investors are pricing in roughly an 86% probability of a 25-basis-point increase in the US federal funds rate at the December meeting.
Markets are also beginning to price in the continuation of monetary tightening in January, with the possibility of another rate hike in April.
These prospects help support the dollar, as higher interest rates generally bolster the appeal of dollar-denominated investments.
The greenback strengthens against major currencies
In the foreign exchange market, the dollar recorded broad-based gains against the major international currencies.
The sharpest advances were observed against the Canadian dollar and the Swiss franc.
At the same time, oil prices rebounded, erasing part of the losses accumulated over the previous two sessions.
Investors’ attention is now focused on upcoming US economic data and Fed decisions, which could influence the dollar’s trajectory on international markets.
