FX.co ★ Dollar could rise higher

Dollar could rise higher if Fed Chairman Jerome Powell insists on following Paul Volcker's steps in fighting inflation.

On Tuesday, the Bloomberg Dollar Spot Index already hit a record high, while the Intercontinental Exchange Inc. was about a third below its all-time high in 1985. The Fed's own index was about 11% below its March peak this year.

Despite the obvious differences in the macroeconomic environment now and 40 years ago, the diversity of dollar indicators hints that traders are not fully convinced that Powell will be as unwaveringly hawkish as his predecessor. The Bloomberg Index, which is broader than its peers and contains key emerging market currencies, is likely to be below its peak if it was around that time.

Of course, Powell still has an opportunity to reaffirm his commitment to fighting inflation as he is yet to announce the Fed's next policy decision and rate outlook later this month.

"Powell has taken several steps in the direction of Volcker's famous resolve, more openly acknowledging that economic hardship is likely to be the price to be paid in the near term to get inflation back on target," said Sean Callow, senior FX strategist at Westpac Banking Corp. He added that most central bankers like to be compared to Volcker, and the closer Powell gets to it, the more sustainable the yield appeal of the US dollar will be.

"It comes as no surprise that dollar hit a fresh record high on both safe-haven flows from global economic weakness and as a resilient U.S. economy paves the way for the Fed to remain aggressive," said Edward Moya, chief market analyst at Oanda. "King dollar has awoken from a nap and that could spell a lot more pain for the European currencies," he added.