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- In the US, the central bank is preparing to raise interest rates this year, which could also affect the currency market.
- If the US leads in rate hikes and Europe lags, it could play into the hands of the dollar.
- Currency expert Justin Derk discusses the prospects for the US currency in 2022.
Inflation will be a major theme in 2022, and it will be observed in the forex market, especially if you look at interest rate growth.
The price of living is rising in Europe and the United States. Out Eurostat statistics This shows that inflation in the euro area rose to an average of 5 percent in December.
On the other side of the ocean, inflation is completely out of control. In the United States Swelling It has already risen to almost 7 per cent at the beginning of the year.
For example, Americans spent more than half on a gas pump twelve months ago. Even if oil prices do not continue to rise, it is already clear that inflation will be above the US Bank’s target of 2 percent. The consequences could largely determine the direction of the dollar in 2022.
The best way to control inflation Raises interest rates. In the United States it is now only 0 to 0.25 percent. Initially, traders thought this would not change in the New Year. In mid-September, traders at CME Derivative Bureaus set a 50 percent chance that interest rates would not rise in 2022.
Inflation Fires: High Interest Rates in the United States
However, rapidly rising inflation has ignited interest rate expectations. Currently, there is only a 1 percent chance that there will be no tariff hikes in the United States this year. The US Federal Reserve’s policy rate is expected to be close to 1 percent or higher by the end of this year, with CME traders set the price at 70 percent.
Also high interest rate makes it more attractive to have capital in the relevant currency. Given the difference in interest rate expectations for the United States and the eurozone, this could play into the hands of the dollar.
The US currency has risen 4 percent since mid-September Against the euro. If US inflation remains high and the potential for further rate hikes increases further, the dollar may appreciate. But despite the unexpected rise in tension in the financial markets, the currency has good prospects.
Dollar: A safe haven in political unrest
For example, with gold and the Swiss franc, the dollar is one of the safest havens in the financial world. For example, as the corona virus panic peaked in March 2020, the dollar rose sharply to a three-year high against the euro.
There are all sorts of things that could have a shocking effect in 2022. For example, the escalation of the conflict between China and Taiwan, the Russian invasion Ukraine Or the arrival of the new corona variant.
However, it will take a little more than a small setback to actually raise the dollar. At most, if one event slows economic growth, inflation will fall again, which will reduce the likelihood of multiple US interest rate hikes. It has a negative effect on the dollar.
While the dollar has good prospects at the beginning of 2022, it will be interesting to see where the dollar stands when the balance of the year is drawn in twelve months.
Just Justs is a currency expert iBanFirst. He has more than twenty years of experience in the world of currency.