March Federal Open Market Committee (FOMC) minutes show that were it not for the war in Ukraine, the Fed would have kicked off its tightening cycle with a 50bp hike. The fact that the Fed wants to move to a neutral posture 'expeditiously' and that even tighter policy may be warranted, should keep the dollar bid, economists at ING report.

Expeditious Fed to keep dollar supported

“It seems clear that the Fed would have opted to start the cycle with a 50bp hike were it not for the war in Ukraine. Some clarity was also provided on quantitative tightening. It looks like the Fed will start shrinking its balance sheet after the May meeting, at a rate of $95bn per month. All points to the Fed applying a heavy foot to the brakes, which should be positive for the dollar.” 

“Few central banks will be able to match the pace of Fed tightening this year and the dollar should stay strong – especially against the low yielders of the Japanese yen and the euro.”

“We feel the dollar can play catch-up with some of the recent rise in short-dated US yields and see the US dollar index launching a test of 100 shortly.”