Fed Hiking Rates May Move Dollar Index To Levels Of 112.60 -113.30

An aggressive rate action by the US Fed to tame the inflation has led to a sharp appreciation in the US dollar, as per a report by Emkay Wealth Management titled 'Navigator'. "The continuous tightening by the Fed will push Dollar index to levels of 112.60-113.30. On the lower side, 106.40 and 104.50 are strong support levels for the Dollar index. The European Central Bank is on a rate tightening phase, and the aggressive hikes will take the Euro-Dollar to its original levels of 0.75-0.80," Emkay has said in a report.

The current stance of the US Fed and an aggressive action is being priced in swiftly by the markets. If the action on rates so far, and the signals from the Fed in the recent past is anything to go by, it can be safely concluded that the Fed's hard money policy will prevail at least till the end of the year. The US Dollar currency yield is going to rise faster relative to other currencies, and it is going to provide strength to the currency. The other factor that has helped the Dollar could be the slower responses by other countries to inflationary spiral through rate action which has created a lag in terms of the currency responses too.

The Dollar Index has been on an upswing, and the recent ranges have been 104.50 to 109.50. The strength the index gathered in the recent months has been mainly due to the rising US interest rates. There is yet another factor that lends immense amount of support to the Dollar. Under conditions of volatility in the markets and generally high inflationary conditions there is often a movement from non-dollar denominated assets to dollar denominated assets. Also, a major chunk of central bank assets is in the US Dollar denominated assets, and it will continue to be so till conditions in the Euro bloc and the Eastern Bloc do not stabilize. Euro and Japanese Yen have hit the lowest levels against the US Dollar in two decades.

A glance at the last two decades of the Dollar Index displays a wide range from 119.43 as of Apr 2002, and a low of 71.80 in Apr 2008. But in the last one decade the range set has been 79.78 in Apr 2014 and 109.56 levels set very recently. This is just an indication of the breadth in the movements which the index could attain over a period of time.

Given the resolution of the Fed to enhance the rates to contain inflation the likelihood of the index moving up to 112.60 -113.30 levels cannot be ruled out. On the downside the strong support levels are at 106.40 and 104.50. However, it may be recalled that with a higher weightage for Euro, it is actually the Euro-Dollar relationship that matters when it comes to the movement of the Index. Europe is being torn into by creeping inflation accentuated by the high fuel and gas costs, and it is likely to aggravate further. Any major rate cation from ECB could take more time and Euro-Dollar may be targeting its original levels like 0.75 to 0.80. This may allow some room for the Index to rise.

Courtesy: Emkay Global