Amid strengthening expectation of the Federal Reserve aggressively hiking interest rates in the world’s largest economy, the US dollar index broke past the 101 mark on Tuesday, the first time that level was breached since March 2020.
With inflation running around 40-year highs for some time now in the US, the Fed has already hiked its key benchmark rates by 25 basis points in March and speculation is strong that the central bank will follow it up with multiple 50-basis-point hikes starting as early as next month.
The prospect of higher US interest rates has pushed up yields on the country’s bonds, making the returns on those instruments more appealing for global investors and correspondingly leading to more demand for the dollar.
The intensifying conflict between Russia and Ukraine has also contributed to the dollar’s strength as the global economic upheaval caused by Moscow’s invasion has sent investors rushing to the safety of the greenback.
Typically in an environment of risk aversion, investors prefer debt instruments over equities as the former are considered to be safer.A clear-cut way in which a stronger dollar index affects domestic financial markets is the depreciation of emerging market currencies, including the Indian rupee.