Although the Federal Reserve has not yet managed to control inflation, it has effectively tamed
the strong US dollar with its evolving policy outlook. The US dollar dropped to at least one-
month lows against the Canadian dollar, sterling, and yen, continuing a Fed- and data-driven
decline. At the same time, there was little change to the euro.
After the Fed increased rates by an excessive 75 basis points (bp) in July and acknowledged a
slowing economy that was apparent in the most recent GDP numbers, the dollar’s popularity
declined. The US economy struggled to develop in the first two quarters of 2022 despite having
the fastest growth (5.7 percent) in the previous year since 1984.
The economy has lost a lot of momentum, and the probability of a recession has increased due
to high inflation and the Fed’s swift rate increases to combat it. As a result, the market now
expects the Fed to propose fewer and smaller interest rate hikes, with a greater likelihood that
rate cuts will start early in 2023.
A surge from 1.0145 to 1.0254, the day’s high, as US equities headed for their best month since
late 2020 in a risk-on climate, helped the EUR/USD close the month with a 0.28 percent gain.
However, the US dollar was also losing ground due to the Federal Reserve’s dovish stance and
a general perception that officials were becoming more sentimental.
In addition to weighing on US rates and the dollar, the US Gross Domestic Product contracted
by 0.9 percent in the previous quarter, following a 1.6 percent decline in the quarter before. For
the second meeting in a row, the US Federal Reserve increased its policy rate by 75bp, while
Federal Reserve Chair Jerome Powell noted that the Fed could slow the pace of its increase at
In the meantime, despite the German economy stagnating, the Eurozone’s GDP growth was
above expectations, increasing by 0.7 percent for the second quarter (exp: 0.2 percent, prev:
0.5 percent). France and Spain also outperformed expectations. However, traders could prefer
to concentrate on such consequences due to the strain on the continent’s energy supply.
The EU decided to reduce its gas use by 15% from August 1, 2022, to March 31, 2023, in order
to save money before winter and be ready for more significant disruptions of Russian gas
supplies. In terms of monetary policy, the ECB began to boost interest rates and delivered a
rate increase of more than 50 basis points. But, due to concerns about a possible recession,
markets started to scale down their expectations for a rate increase in September.
In response to a second consecutive quarter of poor US GDP data and Chair Powell’s less
hawkish remarks, the Japanese yen surged to an almost six-week high above 132 against the
dollar, recovering further from 24-year lows.
The yen also gained when Bank of Japan (BOJ) Deputy Governor Masayoshi Amamiya stated
that the central bank must always consider the best method to end the ultra-loose monetary
policy, even if the actual transition won’t take place for some time. He echoed the sentiments
expressed earlier by newly elected BOJ board members Hajime Takata and Naoki Tamura, who
stated the central bank needs a plan to wind down its expansive stimulus program.
Amamiya emphasized the necessity to maintain loose monetary conditions, contending that
wages must catch up to increase demand and aid Japan’s economic recovery.
In response to the US GDP data and Powell’s remarks, the New Zealand dollar traded at $0.63,
close to its highest level in over a month. These developments suggested that US monetary
tightening may be slowing down.
However, domestically, New Zealand’s headline inflation increased by 7.3 percent in Q2 of 2022
compared to the same period a year earlier. This increase is the fastest in 32 years, and the
central bank may increase interest rates by an unprecedented 75bp at its policy meeting in
The Reserve Bank of New Zealand (RBNZ) announced that it would “continue to tighten
monetary conditions at pace to maintain price stability and support maximum sustainable
employment.” Accordingly, the increase in the policy rate by 50 basis points to 2.5 percent was
The United States economy unofficially entered a recession as gold saw its strongest week in
five months. But after losses in the previous three months, it also ended July in the red.
The World Gold Council, which usually supports gold prices, stated that its view for the second
half of 2022 was, at best, “mixed.”
In addition to a strong dollar, the Council warned that possible inflation easing despite vigorous
monetary policy tightening might “create headwinds for investment, both through ETFs and the
OTC [over-the-counter] market.”
The WGC did, however, have some good news. There may be upside potential for gold as a
safe haven in a recession if weaker equities and fixed income investments perform poorly.
The PCE’s increase for June provided evidence to the Commerce Department that inflation was
unrelenting and at four-decade highs and that the Fed may not yet be through raising interest
rates to combat rising prices. Since March, the central bank has increased interest rates four
times, with the most recent two hikes of 75bp being the largest of their kind in 28 years.
Since reaching record highs above $2,100 in August 2020, gold has not been able to live up to
its reputation as an inflation hedge for most of the last two years. One factor in this has been the
strengthening Dollar Index, which is up 11 percent this year after rising by 6 percent in 2021.
In contrast to gold, the dollar has dropped versus a basket of six other major currencies by
roughly 1 percent during the last few days of July.
Markets anticipate that the Fed will increase rates in September by at least 50 basis points.
According to CME Group data reported by CNBC, traders were allocating approximately a 53%
likelihood that the Federal Reserve would go even further with a third consecutive 0.75 percent
increase in September.
The USD exchange rate initially rose on expectations of a very hawkish Fed, but concerns
about whether the Fed can maintain rate increases at this pace through the third quarter and
beyond have caused it to drop. The main concern is that if monetary policy is tightened too
quickly, it could push the US into recession.
HSBC analysts also supported the US dollar trend. According to their forecast for the
“The US Dollar Index (DXY) has been on an uptrend since June 2021 and is showing little sign
of coming to an end. The outlook for the Federal Reserve’s (Fed) policy and global growth are
likely to prove USD supportive over the short to medium term.”
“As Fed policy tightening takes hold, it could point to a greater burden on US growth, but one
shared by the rest of the world. Global growth momentum is clearly deteriorating. We continue
to view this as USD positive, especially if growth concerns elsewhere intensify (e.g. energy
supplies to Europe).”
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