Forex 2021 year in review: King dollar reigns again

We’re jumping the gun by a couple of (likely quiet, low liquidity) trading days, but regardless of how the rest of this week shakes out, 2021 was clearly a stellar year for the US dollar. As of writing, the world’s reserve currency rose against every one of its major rivals this year, in some cases by as much as 10%:

Source: FinViz

So why was 2021 such a strong year for the greenback?

If we had to boil it down to a single factor, the dramatic hawkish shift from Fed Chairman Jerome Powell and company would certainly be up there. At the start of the year, the Fed was expected to maintain its unprecedentedly accommodative monetary policy for the remainder of the year, with no expectation of interest rate hikes until (maybe) the very end of 2022.

However, as inflation surged through the summer, eventually forcing Powell to throw in the towel on his “transitory” characterization of price pressures, the US central bank made a big shift toward tapering its asset purchases – and then accelerating that taper last month – setting the stage for a potential interest rate hike by the time we reach the summer solstice.

Indeed, the monetary policy decisions by various central banks go a long way toward explaining ALL of the big moves among the major currencies this year, as they often do. The Bank of Canada and Bank of England were among the more hawkish of major central banks, winding down asset purchases and outright raising interest rates respectively; not surprisingly, the loonie and pound sterling were the next two strongest major currency pairs this year.

Meanwhile, the Bank of Japan and European Central Bank are seemingly as far from removing stimulus as ever based on recent comments, and in that light, it’s no surprise that the yen and euro were the weakest major currencies this year.

As we flip our calendars over to a new year, sometimes it’s the timeless lessons that are the most important to remember: Monetary policy was the biggest drivers of currency values in 2021, and with plenty of uncertainty over the path of interest rates and asset purchases in 2022, central bank policy is likely to be one of the most important factors to watch in the coming year and beyond!