The U.S. dollar begins the final quarter of 2022 bolstered by the same fundamentals that propelled it higher against major currencies for most of the year — with virtually nothing standing in the way of more gains.
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Aside from a hawkish Fed moving full speed ahead on higher rates, there are a few reasons the dollar will end the year on an even stronger footing: There’s an argument to be made that the dollar’s gains are approaching a tipping point. Yet absent an intervention threat that injects two-way risk into a one-way trend, dollar weakness is unlikely to materialize anytime soon.
A strong currency helps the Fed's goals of restraining inflation and soaking up excess liquidity in the economy. Bank of America notes that dollar strength is “fully justified by underlying drivers, but severely tightening global financial conditions," an objective actively sought by the Fed. Most of the dollar’s victims are at least partly reliant on exports, even if a weaker currency exacerbates inflation. As Axios’ Felix Salmon“Policymakers [are] stepping up efforts to stem FX volatility, but evidence from UK, Japan China suggests unilateral measures insufficient to reverse trend,” Bank of America analysts wrote recently. The U.S. won’t act unless there’s “direct blowback from [a] strong USD.
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