The ICE U.S. Dollar Index touched its highest level since early January on Friday, as a stream of positive economic data had traders factoring in a growing chance of a half-a-percentage-point interest rate hike by the Federal Reserve in March. The index was up almost 0.1% at 103.93 during the New York afternoon after touching almost 104.67, a level last seen on Jan. 5, based on Refinitiv data.
The move comes as rates on 1-month TMUBMUSD01M and 1-year bills TMUBMUSD01Y also moved higher on expectations for continued Fed rate hikes. Meanwhile, all three major stock indexes DJIA, SPX, and Nasdaq were off, led by a 1.1% drop in the Nasdaq.
The dollar index has fallen from its 20-year high reached in September largely because of improving inflation data, which had investors and traders hopeful that the Fed could back off on the pace of rate hikes. Unfortunately, inflation isn’t falling fast enough and the economy is proving to be more resilient than many thought, so traders and investors are updating their expectations for how much higher interest rates could go.
Fed-funds futures reflect a growing possibility that the Fed will need to boost the size of its March 22 rate hike, to a half-of-a-percentage point. This is an indication that the economy is doing better than expected, and that the Federal Reserve will need to take action to prevent an over-heating of the economy. As former Treasury Secretary Larry Summers told Bloomberg, there is a risk that the Fed will need to hit the brakes “very, very hard.”
This increase in the dollar index is a sign that the market is expecting the Federal Reserve to raise rates in March. This is likely to have a significant impact on the economy, as higher interest rates tend to slow economic growth. Higher interest rates also make it more expensive for businesses and individuals to borrow money, and can lead to a decrease in consumer spending.
At the same time, higher interest rates can also be beneficial for savers, as they will see an increase in the return on their savings accounts. Higher interest rates can also help to reduce inflation, as it makes it more expensive for businesses to borrow money, which can lead to a decrease in the cost of goods and services.
Overall, the increase in the dollar index is a sign that the Federal Reserve is likely to raise interest rates in March. This will have a significant impact on the economy, as higher interest rates can lead to slower economic growth and higher costs for businesses and individuals. However, higher interest rates can also be beneficial for savers, as they will see an increase in the return on their savings accounts. Ultimately, it is up to the Federal Reserve to decide what action to take, and it remains to be seen how the markets will react to any rate hikes.
