Currency Markets In 2022: Truly Fed-led!

(RTTNews) - The Fed's inflation combat and the monetary policy tightening tools it pursued for the same, were the most dominant influence over currency markets in the year 2022.

During 2022, the Fed raised interest rates by an unprecedented 425 basis points, lifting the Dollar against other major currencies. Though central banks in many other regions followed suit and raised rates to tame red hot inflation, the Fed's large rate hikes and hawkish commentary was the most pivotal influence, causing the greenback to strengthen rapidly against other currencies.

The Dollar Index (DXY) which measures the Dollar's strength against a basket of six currencies gained close to 8 percent in 2022. From 95.97 as at the end of December 2021, the index dipped to a low of 94.63 in the middle of January 2022. It then steadily climbed and touched a high of 114.78 at the end of September, before settling at 103.52 by the end of the year. Though a hawkish Fed lifted the Dollar, cooler inflation caused the Dollar to retreat from its peak. Just like the Dollar's climb, its retreat too was Fed-led, driven by hopes that the Fed would soon oblige with a dovish pivot.

The Euro shed more than 5 percent against the Dollar over the course of 2022 amidst the war in Ukraine, the high inflation, and fears of a painful recession. The EUR/USD pair, which was at 1.1368 at the end of December 2021, dropped to 1.0702 by end of 2022. The pair's peak during the year was 1.1496 in February, and the lowest point of 0.9535, a two-decade low, was in September wherein the Euro lost its parity to the Dollar.

The British Pound also lost more than 10 percent against the Dollar in 2022 amidst political uncertainty and concerns about the economy. The GBP/USD pair moved from 1.3529 at the end of 2021 to 1.2097 by the end of 2022. Though the pound had strengthened to as much as $1.3750 in January, it dropped to a low of $1.0384 at the end of September, after the tax cuts announced by the government in the mini budget, rattled investor sentiment.

The yen depreciated close to 14 percent against the Dollar in calendar year 2022 amidst a wide divergence between the Fed's hawkish monetary policy stance and the Bank of Japan's ultra-dovish stance. From the level of 115.08 as at the end of December 2021, the USD/JPY pair touched a year-high of 151.96 and a year-low of 113.47, before finally closing 2022 at 131.11. Towards the end of the year, the yen strengthened dramatically after Bank of Japan widened the range for yield curve control. The rally was however short-lived as BoJ later clarified that there was no intention to change the direction of monetary easing.

The Australian Dollar depreciated more than 6 percent to the Dollar in 2022. The AUD/USD pair, which was at 0.7260 at the end of 2021, dropped to 0.6813 by the end of 2022. The pair touched a high of 0.7663 and a low of 0.6170 during the period. Concerns regarding the Covid spread in China and the likely impact on demand for commodities dragged down the currency, though limited by expectations that the RBA would raise rates further to arrest inflation.

In 2022, the Chinese Yuan depreciated more than 8 percent to the Dollar. The USD/CNY pair which stood at 6.3521 at the end of December 2021, ranged between a high of 7.3285 and a low of 6.3046 during the year, before ending at 6.8972.

Markets now await the minutes of the FOMC on Wednesday and the non-farm payrolls data for the month of December, on Friday. The Dollar Index has now rallied around 1.2 percent overnight to touch 104.75. EUR/USD is at 1.0555 whereas GBP/USD is at 1.1980.