US dollar hit new monthly highs amid risk aversion

This week, the dollar has seen its highest growth rate in nearly three months.

On Friday, the dollar index surged past the highs of early May and hit a one-month high of 102.50.

Risk aversion is causing the US currency to become a more desirable defensive asset.

The Fed has not ruled out the possibility of additional rate increases.

This week, the dollar index has been rising four days out of five and is on track to record its largest weekly increase since February.

Reuters reports that this week, the dollar is gaining from its status as a safe-haven asset due to the US debt ceiling standoffs and worries of a banking crisis that are causing unease among investors.

On Thursday, PacWest, a US bank, experienced a 23% drop in its shares after it was made aware of a significant decrease in deposits.

ING suggests that the absence of any advancement towards settling the US debt ceiling could potentially bolster the dollar.

The prevailing opinion on the market is that the dollar will continue to decline, however, RBC Capital Markets does not agree.

The FxPro analyst team has noted that the consumer and import price indexes published this week suggest that the battle against inflation in the US is not finished, and that a long pause (their primary scenario) may not be enough - another rise in rates before a long plateau may be necessary.

Michelle Bowman, a spokeswoman for the Federal Reserve, stated on Friday that the most recent information on inflation and the US labor market does not exclude the potential for additional hikes in the key rate. She believes that the current macroeconomic data does not demonstrate that inflation is decreasing.

Jerome Powell, the head of the Federal Reserve, has indicated his willingness to pause the cycle of increasing rates. However, Bowman's remarks imply that Powell has not yet achieved agreement on this matter among the Fed's leadership.

In recent days, the dollar index has been attempting to rise from the strong support level of 101.

According to the FxPro analyst team, the 101 area on the dollar index appears to be more significant than the 100 level, as the dollar's increase in the first half of 2020 was halted close to this point, apart from a brief surge when the initial lockdowns were announced.