The US Dollar has conceded some ground to the other major currencies compared to the levels that were prevailing almost a month back. The only exception to the currency to which the USD ceded more ground is the Chinese Yuan. Emkay Wealth Management, the wealth management and advisory arm of Emkay Global Financial Services in a recently released note on currencies writes that against the rest of the lot, the losses in Dollar are quite limited, and there may not be any severe losses in the near future for two reasons.
The first is that the potential for further rate hikes in the US is still open, and with inflation remaining stubbornly high the probability of higher rates is also high. In such a situation, the US Dollar may not lose ground.
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The second and more important factor is that during uncertainties the flight to safety especially to the US Dollar denominated assets is a reality. Given the fluidity in the developments around the banking system, this preference for high-quality instruments or sovereign risk may prevail for a few more months. The fall in yields for the US treasury notes and treasury bonds is the result of this movement.
The Dollar Index set a high of 105.60 in the last three months and a low of 101.20 for the same period. Trading at around the 102.00 level, the Index may be set to test the lows seen earlier, and it may try to break the levels on the downside.
But a convincing break of the levels would require a confirmation that the current interest rate policy of the Fed is nearing its peak and that there will not be further hikes. Such a situation may evolve only over the next three months.