• In 2022, the Federal Reserve may find itself returning to its dovish self, weighing on the dollar.
  • The easing of supply chains could push global inflation lower, improving the mood.
  • Covid-19 will likely pop up during the year but extend its retreat.
  • Rising geopolitical tensions could counter dollar selling.
  • America’s mid-term elections mean Democrats will scramble to legislate.

One year up, one year down for the dollar? After two flip-flop years, there are good reasons to expect the greenback to have a rather red 2022. 

In 2020, the pandemic outbreak initially sent it up, while optimism about the recovery turned it down. Inflation became a dominant theme in 2021, eventually boosting the greenback after a weak start. These three themes will likely continue dominating the dollar in 2022, alongside global and domestic politics. 

Federal Reserve may swing the pendulum back down

The world’s most powerful bank remains the No.1 force moving currency markets – and arguably the global economy. The Fed’s hawkish shift in 2021 was based on higher inflation and a robust job market, a sharp about-turn after 2020’s policy review, which allowed prices to run hotter. 

In 2022, the Fed may return to its dovish roots – and not only due to the nomination of Lael Brainard as Fed Vice-Chair. Cooler inflation and somewhat slower growth could slow the bank’s path. 

For markets, anticipation for first post-pandemic rate hike is the dollar’s driving force, and once it happens, markets could “buy the rumor, sell the fact.” Moreover, several other central banks may make sure they remain one step behind the Fed and only tighten policy once Washington acts. 

Fed Chair Jerome Powell’s move could be the high watermark for the greenback, even as additional increases in borrowing costs are likely in 2022. Investors were aggressive in pricing tighter policy in 2021; that could change in 2022. 

Inflation: Mostly about supply chains

Global inflation may have already peaked in November 2021 – at least according to the fact that GM’s car factories have finally become fully operational. The chip shortage – hitting the automotive industry hard – is easing thanks to higher production.

Efforts to unclog critical ports linking the world’s largest economies are also bearing fruit. Los Angeles, Long Beach and Tianjin, on the other side of the Pacific, are under less pressure. The Baltic Dry Index, a global gauge of shipping costs, has fallen sharply. 

The Bank of International Settlements (BIS) – the “central bank of central banks” has put supply chains at the center of the global inflation increase, not fiscal stimulus. 

Semiconductors and long waiting times have pushed underlying inflation higher and could send them down in 2022. What about energy costs? While natural gas prices remain painful in Europe, oil prices may have also peaked.

In the greater scheme of things, 2021 has seen a significant shift in commodity demand that has yet to unfold in 2022 – and it comes from China. The ruling Communist Party seems to have rediscovered its roots which is to aim for “shared prosperity” rather than breakneck growth. 

President Xi Jinping and his colleagues have let Evergrande and other property developers linger in what seems like an attempt to cool down the construction sector. 

China’s stimulus lifted the global economy after the 2008 crisis and was responsible for a “Super Cycle” beforehand. While Xi will not destroy his economy, his newfound ideology means lower, considerably weaker demand. China will continue exporting goods, but also deflation to the US

A cooldown in price rises in all these factors could allow the Fed to go at a slower pace, thus sending the dollar down. 

Covid – taking another step back

When will the pandemic be over? The entire world is asking this question, and with every variant or outbreak, it is harder to find an answer. 

With each cycle the pandemic seems to get weaker. Vaccines have dramatically lowered severe illness, hospitals can better cope with the patients, and economies have adapted. Immunization will likely be in abundance. 

The Greek alphabet has enough letters for new strains, and vaccine resistance – by the virus or by people – could weigh on the global economy. However, the worst remains in the rearview mirror. 

How does that influence the dollar? Negatively, in two ways. First, an upbeat market mood that would ensue from a healthier world is downbeat for the safe-haven dollar. Investors rush to riskier assets in the good times.

Secondly, it would push consumption back toward services and away from goods – easing inflationary pressures. That would also weaken the dollar and the Fed’s urge to tighten policy. 

Geopolitics: Where the dollar could find some solace

China and the US have been at loggerheads for years. The pandemic has only strengthened the need for these massive economies to decouple from each other, and that process may accelerate in 2022. While long queues at Long Beach show this separation could take time, growing political tensions could push the economies further apart.

Sino-American pressures could also simmer ahead of two political events: China’s five-yearly change of leader – XI is set to break tradition and stay on for longer – and America’s midterm elections. The oldest trick in the political book is to focus on external enemies to forget about local troubles. 

Strained cross-Pacific relations could push inflation higher and the Fed toward tighter policy boosting the safe-haven buck. 

Flight to the greenback could also occur in response to other problems. Israel and Iran have been exchanging threats, and Russia is worrying the West by amassing troops on its Western border. Struggles for rare earth in Africa could escalate with the growing demand for these materials in the energy transition. Disasters brought about by climate change could also trigger haven demand, and the list goes on. 

Every scary development that boosts the dollar, however, could prove a selling opportunity. Optimism due to other factors – and plenty of easy money – could trump incidents. Nobody wants a full-scale escalation of tensions – World War III will have to wait. 

Mid-term elections: Democrats’ last attempt to squeeze changes

The fifth and final factor in moving the dollar is November’s mid-terms. Democrats have a minor advantage in the House and the thinnest of majorities in the Senate – and the latter, at least, is highly likely to disappear. 

The president’s party almost always loses seats in these votes, and voters are frustrated with President Joe Biden’s handling of inflation, Afghanistan, and other issues. By winning one chamber, Republicans are set to block any legislative move. 

The stalemate due in 2023 and 2024 will likely push Democrats to make lasting changes in 2022. These could include finally passing their social spending bill and perhaps higher taxes. Investors dislike paying, and any attempt to hike costs could hurt stocks and push the dollar higher.

Any such moves would likely be short-lived. It is essential to note that former President Donald Trump’s 2018 tax cuts did not affect investment or the economy. If anything ever gets passed, raising taxes would likely be a footnote in economic history. 

Efforts to make the economy greener would be positive in the long term but only impact individual stocks in the short term, leaving the dollar untouched. 

Overall, any political headlines could cause quick stirs in markets – something to keep in mind but probably on the backburner.


The dollar is set to decline in 2022 due to fewer tensions about Fed policies, lower inflation and improvements on the covid front. Geopolitics and the US mid-terms could temporarily boost the greenback, but not for long. 

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