FX.co ★ Dollar soars as US inflation rises beyond expectations

Last week, the Fed acknowledged that inflation in the US is high. It intends to develop a monetary strategy according to situation.

Jerome Powell, the Chair of the Federal Reserve, admitted that price increases are more powerful and sustained than previously thought. He said that the asset purchase program could be completed rapidly in order to move more quickly towards a rate hike. As a result, Fed will have to reconsider its plans on these key points. Following Powell's comments, markets began to price in a 60 basis points (bp) Fed rate hike by the end of 2022.

On December 3 it was reported that the national unemployment rate fell to 4.2% in November. This is less than the forecasted 4.5%, which indicates a gradual normalization of the US economy. The fly in the ointment was the number of new jobs (210,000) which is surprisingly low for the US. According to preliminary estimates, they were expected to rise to 550,000 in November. Overall, the United States economy has recovered more than 80% of jobs, approaching pre-demic levels. But it is too early to let the guard down, analysts say.

Many economists consider this data to be contradictory, not entailing any radical changes. The current macrostatistics had an immediate impact on the greenback. At the end of last week, the dollar was declining but is now confidently gaining momentum. In the morning of December 6, EUR/USD traded around 1.1283-1.1284, trying to catch up.

The greenback is strengthened due to rising yields on ten-year US government bonds. According to current estimates, the yield of US Treasuries has increased to 1.38%, significantly exceeding the previous figure of 1.34%. Additional support for the US currency is provided by positive investor sentiment, which continues to believe that the dollar is a safe haven currency. Previously, the strengthening occurred amid fears over the spread of Omicron, a new strain of COVID-19. However, the downturn in tension over the next strain has not caused investors to abandon their preferences. As a result, the greenback is back on track and ready to overcome any difficulties.

According to analysts, the dynamics of the US currency have already taken into account the overreaching inflation rate in the USA. Markets make their forecasts for 2022 taking into account the new realities. So, no surprises are expected. Therefore, the dollar is not vulnerable to excessive volatility, but it is not immune to adverse influences. The coming year will be a testing time for the dollar, which it will overcome without much loss, experts say.