The dollar rose to a more than 3-week high after comments of Fed Chief Janet Yellen, which raised the chances of a rate hike in March already.
The dollar index has registered the fourth consecutive session of growth, as well as a maximum since January 20th, before it sank during the morning session on Wednesday.
Futures market reaction to the federal funds recorded a moderate optimism, as the chances of a rate hike in March amounted to 23%, against 16% previously, while the chances for May rose to 50% from 38%, according to investment bank Jefferies.
Short-term dollar outlook remains uncertain, taking into account the economic policy of Donald Trump, says Richard Falkenhäll, senior currency strategist at SEB.
Since the new administration could change their moods to more expansive because of the tax cuts, the Fed may be forced to tighten monetary policy more rapidly, he said.
“On the other hand, Trump prefers a weaker dollar and behavior of the President since the time of inauguration stimulates the risk premium on USD”, – continues Falkenhäll.
The debates over strong dollar followed the accusations of Peter Navarro, Trump’s adviser on trade issues, in the devaluation of the currency, which were brought against Germany. However, Finance Minister Wolfgang Schäuble admitted that the current exchange rate of the euro is too low for the leading economy of Europe.
In fact, the euro is undervalued by 15%, the study of World Economics showed, carried out on the basis of purchasing power parity.
Similar calculations show that sterling is undervalued by 9%, after the collapse as a result of a referendum in June, and the Chinese yuan is undervalued by 24%.
However, there is a risk that the dollar will weaken in the short term, if the administration does not meet expectations and the sale in the stock market takes place, concludes Falkenhäll, adding that in the medium term, the dollar will be supported and will be traded in the range of parity and 1.05 against the euro in the second half of the year.