Dollar rally may have further to run

The US dollar has continued to grind higher against major currencies following the release of US inflation data on Wednesday, with the DXY index reaching its strongest level in over a year. Recent data, in particular the strong inflation figure this week and payrolls last week, have prompted investors to expect additional hikes from the Fed next year, which has been further reinforced by hawkish comments from Vice Chair Clarida early this week. Our view remains that expectations of earlier hikes by the Fed are overdone, but that the likelihood of the Fed tightening policy in 2022 – and further dollar appreciation – is growing.