The US dollar index keeps consolidating around the 96.00 mark. The price is holding close to its annual high. Market participants are trying to figure out if they should bet on the dollar's further recovery.
It is worth noting that this question was more than appropriate a while ago. However, after Fed Chairman Jerome Powell's testimony, the market was given an unambiguous signal that the US dollar has good chances to strengthen its positions.
Speaking before the US Senate Banking Committee on Tuesday, the head of the US regulator noted that the central bank seriously admits the possibility of accelerating the pace of stimulus reduction amid growing inflationary risks.
In particular, Powell said that he no longer considers high inflation as temporary and that he may reconsider the initial tapering schedule as soon as at the upcoming monetary policy meeting on Dec. 14-15. Such rhetoric brought back speculation on a faster-than-expected interest rate hike.
Let us recall that earlier, at its November meeting. The Fed has already taken the first step towards monetary policy tightening by announcing its plans to reduce the pace of monthly bond buys by $15 billion. Before that, the monthly volume of asset buys amounted to $120 billion.
Market participants now believe that the Fed is ready to go even further and announce an additional $30 billion cut in December. If these expectations are met, the Fed will phase out purchases entirely by March 2022, and the first rate hike will finally be on the cards in many years. Thus, the prospect of further policy tightening may well become the main catalyst for the dollar's growth over the next six months.
The current demand for safe-haven assets provides additional support to the dollar buyers. Investors continue to assess the risks associated with the new COVID variant. Drug manufacturers are concerned that existing vaccines may be less effective against Omicron.
The lack of research causes uncertainty and hence increased volatility in the financial markets. In an interview with the Financial Times, Moderna (NASDAQ:MRNA) CEO predicted that existing vaccines would be much less effective at tackling Omicron.
If the worst fears are confirmed, and the new variant proves to be resistant to vaccines, panic in financial markets can lead to a collapse of all risky assets, with defensive assets such as gold, bonds, and the US dollar benefiting the most from this scenario. That being said, the DXY growth can resume at any moment. The upside target falls in at the psychological 100.00 level.