By Yasin Ebrahim
Investing.com – The dollar hit its highest level this year earlier this week, riding on the coattails of hawkish Federal Reserve commentary, and a plunge in the euro, but the greenback’s rally may peter out next year as growth outside the U.S. resumes.
As the Fed looks set to tighten monetary policy and U.S. economic growth is expected to moderate, growth in developed economies including in the euro area will rebound, denting and possibly reversing the dollar’s advance in 2022.
“My view is that next year, we will see a renewed weakening in the dollar not as an indictment of the U.S. economy, but as better relative economic growth [emerges] outside the United States,” Mark Luschini, president and chief investment officer of Janney Capital Management told Investing.com in an interview earlier this week.
“This recent dollar rally is likely to top out and will weaken throughout the 2022 campaign,” Mark Luschini added.
Federal Reserve commentary showing Fed members are warming up to the idea of stepping up monetary policy tightening amid growing concerns about inflation has helped support the recent rally in the greenback.
San Francisco Federal Reserve Bank President Mary Daly said Wednesday that she would be open to speeding up the pace of the Fed's bond tapering if inflation remained elevated and jobs growth remained strong.
Making up about the 58% of the dollar index, the euro has also played a big role in the recent dollar rally.
The single currency has slumped for three straight weeks as traders have abandoned their bets on any form of ECB monetary policy tightening following fresh pandemic restrictions in Europe and ongoing dovish commentary from the central bank.
“The euro area economic growth is being challenged by the Delta variant and the ECB's explicit reluctance to change interest rate policy or its bond buying regime even in the face of heightened inflation,” according to Luschini.
While the euro is reaching oversold levels, and may be set for a rebound -- that would counter the rally in the dollar – some warn the single currency remains vulnerable.
“We think it is oversold, but in no way would we describe it as cheap,” ING said earlier this week.