In the meantime, expectations of the Fed’s hiking cycle were also escalating, and by March 2015, the US currency had appreciated by 26 per cent on a trade-weighted basis5 and reached $ against the euro, a level that was only expected amid actual US tightening6. This was the largest appreciation ever in the run-up to an interest-rate tightening cycle in the US.
The outlook for the US dollar will, to a large extent, depend on two fundamental factors: the pace of widening interest-rate differentials and the performance of the US economy relative to its major trading partners, although other factors – such as portfolio reallocation – can at times temporarily dampen the importance of these two factors, as occurred in 2014.