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The Dollar Surge of 2022: A Modern Case of Policy Divergence

In 2022, the US dollar rose to levels not seen in about two decades. The dollar index moved above 114 in late September, and many currencies fell sharply. The episode illustrates several principles from this series.

The main driver was divergence in policy. The Federal Reserve raised interest rates rapidly to fight inflation, while the Bank of Japan kept rates near zero and the European Central Bank started tightening later and more gradually. Yield differences widened, favoring the dollar.

Energy prices added pressure on Europe and Japan, worsening their terms of trade. The war in Ukraine raised concerns about European growth and energy supply, pushing the euro below parity with the dollar for a time.

Safe-haven demand and dollar funding needs contributed as global risk appetite fell.

The pound experienced additional stress in September after a fiscal announcement caused turmoil in the gilt market, and the Bank of England intervened.

Japan's authorities intervened to support the yen, as discussed earlier.

The dollar later retreated as inflation fell and expectations of Fed tightening eased. Strong trends can reverse when the drivers shift.

For traders, the episode combined interest rate differentials, real yields, commodity effects, safe-haven flows, intervention, and political risk. It is a useful case to study with a chart and a timeline.

Practical step: build a timeline of the main drivers of the 2022 dollar move, and mark the key dates on a chart.

Building the timeline is a great exercise. Putting Fed hikes, the gilt crisis and the yen intervention on one chart shows how many drivers lined up at once. Some of the points: the Fed started hiking in March 2022, then moved to 75 basis point hikes from June. EURUSD fell below parity in July. Japan intervened to buy yen on 22 September with USDJPY near 146. The UK mini budget on 23 September sent GBPUSD to around 1.035 within days. The dollar index peaked above 114 in late September and then fell back over the following months as US inflation started cooling. Seeing it laid out shows how a trend builds.

EURUSD below parity was a big psychological moment. Round levels like that attract a lot of attention, and the reaction around 1.0000 is worth studying. Price first touched parity in mid July 2022, bounced, then broke below in late August and spent several weeks below it, reaching around 0.954 in late September. Then it reclaimed parity in November and kept going higher. Looking at the 4 hour chart around those dates shows several false breaks and quick reversals around 1.0000. Big round numbers draw option strikes and stop orders, which creates that kind of choppy behaviour. It's a pattern you see again and again at levels like that.