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Part of Major central banks, including the FED, BoC, BoE, and ECB, are facing inflation pressure, with Fed decisions setting the tone for G7 peers.

How will the Federal Reserve's tightening cycle affect the US Dollar?

The Fed's renewed tightening cycle is causing the US Dollar to strengthen and bond yields to rise. The Federal Reserve's renewed tightening cycle, which included a 25 basis points interest rate hike last week, is driving a stronger US Dollar and firmer bond yields. This shift is part of the Fed's effort to combat crude oil price-led inflation. The rise in US government bond yields has been significant, with the US 10-year bond yield climbing above the 5% mark last week.

Reported by 1 independent outlet Written Sep 26
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How it reaches US Dollar (Next day)

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The facts so far

As reported. Each one links to where it comes from.

  • The US Federal Reserve implemented a 25 basis points interest rate hike last week.livemint.com
  • A renewed tightening cycle by the Fed means a stronger US Dollar and firmer bond yields.livemint.com
  • The US 10-year bond yield climbed above the 5% mark last week, its highest level since 2007.livemint.com
  • Global emerging market funds recorded their first outflow in 10 weeks of $877 million.livemint.com

Why it matters

A stronger US Dollar and higher US yields increase the cost of capital globally, which hurts earnings growth prospects for corporations. This also exerts pressure on risk assets, such as emerging market equities, and can invite imported inflation in Asian countries, making their own inflation fights more difficult.

This trend is part of a broader developed-market hiking cycle, with the European Central Bank and Bank of Japan also having raised rates. The shift in US monetary policy dictates foreign flows into Asian markets, leading to capital outflows from certain regions, such as South Korea and India-focused funds.

What we don't know yet

  • What will the timing and quantum of the next Fed hike be, given the Fed meeting in October and December?
  • How will the continued high crude oil price of $110/barrel affect the Fed's future rate decisions?

What would change this answer

Crude oil prices fall significantlyThe pressure on the Fed to maintain high interest rates may ease, potentially slowing the strengthening trend of the US Dollar.
The Fed signals an imminent pause in rate hikesThe expectation of a 'higher-for-longer' interest-rate scenario would diminish, likely reducing the strength of the US Dollar.

— Other considerations

Beyond this explainer

Questions worth asking

Ideas the web ties closely to this story that the explainer doesn't mention. These are prompts for your own research: Brind hasn't answered them.

  • About Fed Chair Jerome Powell

    What is the Fed Chair's view on whether the current tightening cycle is sufficient to combat crude oil price-led inflation?

  • About Jerome Powell

    How might Jerome Powell's statements influence the global flow of capital into Asian markets?

  • About WTI Crude Oil

    How does the current volatility in WTI crude oil prices affect the Fed's ability to control inflation?

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The full eventFed Rate Hike Drives Capital Outflows and Higher Yields in Asian Markets Everything aboutUS Dollar (Next day)

Brind's analysis is written by AI from the reporting linked above and can be wrong. It is not investment advice; do your own research.