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Dollar Set to Snap Losing Streak After Swagger Returns Ahead of Fed Meeting

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By Yasin Ebrahim

Investing.com – The dollar jumped Friday, and is set for its first weekly gain in three weeks as the prospect of fresh clues on Federal Reserve monetary policy and weakness in the euro has restored some swagger to the world's reserve currency.

The U.S. dollar index, which measures the greenback’s strength against a trade-weighted basket of six major currencies, rose by 0.51% to 90.54.

There are just days to go until the Federal Reserve's two day meeting on Tuesday and Wednesday, and recent hot inflation report is likely to get the conversation started on tapering. This is good news for the yields and the dollar.

"The discussion about a Fed exit from bond purchases in the face of rising inflationary pressures should drive the yield on ten-year Treasuries to 2%," Commerzbank (DE:CBKG) said in a note. "For the dollar, we see upside potential in the short term due to the economic boom in the US."

But the lift to the dollar will only hold out as long as inflation delivers its end of the bargain. If the pace of inflation fades, then all bullish bets on the greenback are off.

"If inflation falls again next year, and it becomes clear that the Fed is taking its time with interest rate hikes, we expect yields to fall again somewhat and the dollar to weaken again," Commerzbank added.

Still, Treasury yields were hovering at unchanged levels on Friday, suggesting the greenback had been given a helping hand from a demise in the euro, which makes up about half of the weighing of the dollar index.

EUR/USD fell 0.52% to $1.2106.

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