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Dollar Rally Goes into Reverse, investors expect further declines

US Dollar had a fantastic year!

The dollar’s rise has had a global effect, helping to push foreign currencies down to historically low levels.

Tweet on USD chart history

FED Chart on dollar fluctuation

The U.S. dollar’s rally in 2022 gave the world a reminder of the currency’s ability to inflict pain on the global economy. Investors are optimistic that the dollar’s strength has now run its course.

As of Dec. 28, the dollar has risen 8.9% this year as measured by the WSJ Dollar Index, which tracks its value against 16 other currencies. That would mark its biggest yearly rise since 2014. The index peaked in late September at the highest level in data going back to 2001.

But the dollar is ending the year on the defensive, having given back roughly half of its gains since that high-water mark, as investors bet that U.S. inflation is slowing.

Most investors were caught off guard by the greenback’s strength this year. The currency had already risen in 2021 on expectations that the Federal Reserve would start raising rates this year to tame what Wall Street believed was a temporary increase in inflation. Some investors thought the dollar was overvalued and poised for declines.

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Few were expecting inflation to stay so stubbornly high, or for the Fed to raise rates by more than 4 percentage points in the span of nine months. Rising rates boost the dollar by attracting investors from around the globe into U.S. assets such as Treasury bonds.