The US dollar has been on a relentless rally over the past few months, appreciating nearly 6% against the Japanese yen and hitting multi-month highs against the euro. 

This ​​strength ​reflects ​investors’ outlook ​on ​monetary ​policy ​and ​economic ​growth ​in ​the ​major ​economies​.​

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• Dollar hits multi-month highs against euro and yen due to Fed rate hikes.

• The US economy is showing resilience, while Europe and China are slow. 

• The dollar rally is expected to continue near-term but moderate as the Fed approaches the end of a tightening cycle.

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What’s Fueling the Dollar’s Ascent Against Global Peers

Driving the Dollar Higher

The main catalyst behind the dollar’s ascent is the Federal Reserve’s interest rate hiking cycle aimed at taming high inflation. 

After a red-hot January consumer price index (CPI) print of 6.4%, markets expect the Fed to raise rates above 5% this year and only start cutting in 2025. 

This ​​contrasts ​with ​the ​Bank ​of Japan ​and ​the ​European ​Central Bank​​, which ​​still hold ​low ​rates ​to ​support ​growth​​​.

The prospect of higher US yields versus rock-bottom rates in Japan and negative yields in Europe makes dollar-denominated assets highly attractive. 

This is evident in the nearly 6% appreciation in the dollar-yen pair this year. 

The euro has also fallen to three-month lows against the greenback.

Recent US economic data has been mixed but still points to resilience compared to other major economies. 

While January retail sales fell, the labor market remains exceptionally tight, with unemployment at 50-year lows. 

The ​manufacturing ​and ​services ​sectors ​continue ​expanding​, ​too​, ​based ​on ​PMIs​​.​

In contrast, the eurozone is flirting with recession amid an energy crisis, and China is recovering slowly after dismantling its strict zero-COVID policies. 

With the US outperforming, the dollar is seen as a haven bet.

What Next for the Dollar?

The dollar index, which measures the greenback against major peers, recently hit a three-month high above 105. 

But it has retreated slightly as markets question how much more the Fed will tighten policy.

Futures markets expect around 90 basis points of rate hikes this year, down from 145 basis points in early February. 

If inflation keeps trending down, the Fed may not need to raise rates as high as previously thought. 

This ​​could ​limit ​further ​upside for ​the ​dollar​, ​especially ​if ​global growth ​recovers​.

Still​, the ​Fed ​remains ​focused ​on ​anchoring ​inflation expectations ​by ​tightening ​policy​​​. 

With other major central banks still easing, the dollar looks set to maintain its current yield advantage.

The ​Bank ​of ​Japan ​is ​also ​concerned ​about ​​the yen depreciating ​too ​quickly, ​hurting ​exports ​and ​inflation​. 

There is some speculation Japan could intervene directly in currency markets to support the yen if the dollar pushes much higher.

Overall, ​the ​US ​dollar rally ​looks set ​to continue ​in ​the ​near term but ​at ​a ​​more moderate ​pace​​. 

This year, the Fed policy path and relative economic performance will remain key drivers. 

Investors should brace for some dollar volatility, but its haven appeal still makes it an attractive bet compared to other G10 currencies.