The dollar stages a comeback, with the Fed's war on inflation putting it on course for its first monthly gain since September
- The US dollar is on track to snap a four-month losing streak.
- The greenback is up almost 3% in February with investors expecting the Federal Reserve will carry on raising interest rates to crush inflation.
The dollar looks set to snap a four-month losing streak in February, with investor expectations that the Federal Reserve will keep up its war on inflation through 2023 powering the greenback higher.
The US Dollar Index, which tracks the buck's performance against a basket of six alternative currencies, has climbed just under 3% this month – meaning it is on track for a first monthly gain since September 2022.
The US currency has rallied thanks to the prospect of further interest-rate rises, which has become a top-of-mind issue for markets over the past month.
Rising rates tend to be bullish for the greenback, because they make it more attractive to foreign investors who are seeking higher yields.
Buying the currency was one of the hottest trades of the first nine months of 2022 as the Fed brought in four consecutive outsized rate hikes.
But it gave up much of those gains in the final quarter of the year amid growing speculation that the central bank would have to start lowering interest rates to prevent a 2023 recession.
Traders have started bracing for higher-than-expected rates once again this month, with high wage levels and surging rental costs both seen as a sign that the Fed will likely have to raise borrowing costs above 5% and then hold them there to rein in inflation.
And the expectation of higher interest rates has fueled the dollar's resurgence, according to analysts.
"Concerns over stubbornly high wages in the labor market, coupled with still-elevated rents, have currency markets on alert that the Fed could, if necessary, continue to raise rates longer than initial forecasts," LPL Financial's chief strategist Quincy Krosby said in a research note last week.
"The dollar's course remains focused on inflation and the Fed's monetary response. King dollar finds itself at a significant crossroads yet again," he added.