The greenback jumped to mid-2020 highs on Thursday as markets continue to digest a hawkish message from the Federal Reserve. Powell said he wouldn’t rule out hiking rates at every meeting starting in March.
The central bank also plans to shrink its balance sheet, which has doubled since the start of the pandemic. Against this backdrop, the dollar rallied across the board, capitalizing on the widening divergence in monetary policies between the US and other countries.
Also, the aggressive tone delivered by the FOMC triggered widespread risk aversion across the financial markets, thus putting more buying pressure on the safe-haven American currency. Adding to the positive momentum surrounding the greenback, the latest data out of the United States painted a rosy picture of the economy.
The report showed that the country’s GDP grew 6.9% in the fourth quarter, well above the forecast for a 5.5% growth. Furthermore, weekly initial jobless claims fell to 260,000 from the previous week’s print of 290,000. The USD index exceeded the 97.00 figure for the first time since July 2020, adding more than 1% on the day.
As such, EUR/USD derailed the 1.1200 level to notch fresh multi-month lows in the 1.1135 area during the European hours. It looks like the downside momentum would persist in the near term as USD bull are now betting on more aggressive Fed, with the common currency threatening the 1.1100 support zone for the first time since June 2020.