The US Dollar after a brief spell of sluggishness re-established its position of strength against all currency majors. This will continue well into the future mainly as the Fed starts preparing for the tapering of the bond purchases in the next two or three months. While tapering will reduce the liquidity in the system it will also induce money parked in overseas markets, especially the emerging markets, to move into the US markets. This leads to currency depreciation in those affected markets and appreciation of the Dollar. We have seen exit by foreign investors from a number of markets around the world in response to the likelihood of the Fed tapering happening soon. The US rates have edged higher, and the rates may move up further as the hints from the Fed point towards an early normalization of liquidity. In view of the inflationary pressures, the Fed could move towards rate action
later in the year 2022. The market will gradually price in these possibilities, and this will prepare a strong ground for US Dollar appreciation. Despite better-than-expected jobs data, the Pound Sterling has not been able to hold up against the Dollar. The same is true of the Euro as well. There is rising prices in the Euro area, and still there is no response from the ECB stating that policy responses need to be in place to tackle inflation. In this we can see some difference between the approach of the Fed and that of the ECB. The ECB’s stance may be causing some weakness in the Euro in the immediate term. The underlying US Dollar strength will prevail for much longer time than expected.