The U.S. dollar and related exchange traded fund maintained their upward momentum, moving toward their highest level in almost two years, as increasingly hawkish Federal Reserve officials pushed for aggressive changes to the central bank’s monetary policy in response to elevated inflationary pressures.
The Invesco DB US Dollar Bullish (UUP), which tracks the U.S. dollar against a basket of developed market currencies, rose 0.1% on Tuesday and was trading at its highest level since May 2020.
Meanwhile, the dollar index gained as high as 99.526, its highest level since late May 2020.
The USD is appreciating in hopes that the Federal Reserve will hike interest rates or tighten its monetary policy, will reduce the supply of all the extra money floating around in the U.S. economy.
Supporting the gains in the greenback, Fed Governor Lael Brainard, who has usually been one of the Fed’s more dovish policymakers, argued for methodical interest rate hikes and rapid reductions in the Fed’s almost $9 trillion balance sheet to bring U.S. monetary policy to a “more neutral position” later this year, Reuters reports.
Kansas City Fed President Esther George, a voting member of the Federal Open Market Committee, also backed the idea of a rapid cutback in the Fed balance sheet and argued that “50 basis-points is going to be an option that we’ll have to consider.”
“The dollar’s moves were primarily a function of Brainard’s hawkish comments today. She was very clear on two things,” Erik Nelson, macro strategist at Wells Fargo Securities, told Reuters.
“One, the Fed wants to reduce the balance sheet quite aggressively and much more quickly than the last cycle. And two, the Fed is really open to a 50-basis point hike and could do so at any point over the next few meetings. This is the kind of language that you don’t see from many Fed officials, especially Brainard,” Nelson added.
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