The US dollar and Canadian dollar exchange rates will be the forex market champions in 2021, while the Japanese yen and euro occupy the last position. The main driver: central bank policy.
The US dollar index (DXY) started trading in early 2022 with gains throughout the Asian session. When the news was written at the beginning of the European session (3/January), the barometer of the US dollar exchange rate has moved back closer to the 96.00 threshold while maintaining the support area formed since late November 2021.
The greenback closed 2021 with its best annual performance since 2015, although it suffered a sell-off towards the end of the year. The foundation of the rally was mainly the surge in inflation and the improvement in the US economy which prompted a change in the Federal Reserve's attitude to become increasingly hawkish. Markets now expect the Fed to start raising interest rates in March, so the outlook for the future remains bright.
The Canadian dollar is the second best performing major. The USD/CAD exchange rate fell quite a bit in December due to speculation surrounding the prospect of a BoC rate hike at the policy meeting this January.
Meanwhile, the Japanese yen and euro displayed the worst performances last year due to the central bank's strongly dovish policy direction. USD/JPY has bounced around 10 percent during 2021, so it is now at its highest on record since March 2017 at around 115.30s. The euro was also depressed about 7 percent versus the USD, and is likely to depreciate even more this year.
"(ECB) is adhering to an ultra-dovish monetary policy setting while the Fed accelerates its tapering and anticipates a (rate) hike," analysts from Scotiabank said in a year-end 2021 note quoted by Reuters, "We expect further weakness in the currency. the common money (Euro) next year is heading towards the 1.10 threshold and possibly beyond, as resistance remains, where support is likely only available from the (nearly unlikely) opportunity for the ECB to raise (rates) in late 2022 or early 2023. "
Outside of the major currencies, the Turkish lira showed the most concerning performance. The lira is down about 45 percent versus the US dollar in 2021. The worst performance in the last two decades was set against a backdrop of soaring inflation, controversy over the Turkish government's policies, and the loss of integrity of the central bank.
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