LONDON - nvtip -- In 2021, the US Dollar Index rose 7% from its January low, driven in part by an increasingly hawkish Fed. With so much upside already priced in, we consider five factors that could drive the dollar in 2022 and beyond.

Geopolitical tensions

Geopolitical tensions, which had abated during the pandemic, are back. Negotiations between Russia and the West are, allegedly, off to a poor start, with Russia insisting that NATO rule out further expansion. Tensions over Ukraine could support the dollar in the near term.

Faster and deeper liftoff

Interest rates rose sharply across maturities in the first week of January, as investors recognized that central banks now prioritize fighting inflation.

Since Jerome Powell was re-appointed, his hawkish pivot has taken many by surprise. Weeks ago, almost all forecasters predicted the Fed would wait at least until Q2 2022 before raising rates. The market now expects a first hike as early as March

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A faster and deeper liftoff in interest rates, and the increasingly likely prospect of quantitative tightening, could support the dollar in the first half of the year.

Stock market correction

The rise in yields on Treasuries brought about a fall in stock market indices, with the NASDAQ down 6.7% from its November high, and high-flying tech stocks hit the hardest.

"At present, the consensus view favors a pivot from growth towards value. However, concerns over slowing growth or a recession could bring about a significant pullback in stocks", according to Stéphane Bottine, founder of TrustedBrokers.com.

A stock market correction would favor safe havens, such as the US dollar.

More dovish Fed

Such a correction could also encourage the Fed to slow the pace at which it plans to normalize policy.

Back in 2018, Jerome Powell raised interest rates four times, much to the displeasure of President Trump. At its December 2018 meeting, many expected further hikes to fend off inflation. Within days, the stock market plunged, and by 2019, Mr Powell had opened the door to rate cuts, rather than rises.

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Whilst inflation may surprise on the upside in the first half of 2021, many expect it to moderate as base effects facilitate comparisons. A fall in inflation could provide the Fed with an excuse to pivot towards a more dovish policy, which would ultimately weaken the dollar.

Political unrest

The first anniversary of the U.S. Capitol riots was a reminder of how polarized American society has become. To this day, nearly three-quarters of Republicans claim they still have doubts over the legitimacy of President Joe Biden's win over Donald Trump.

A rise in political sedition, or outright violence between Democrats and Republicans during the midterm elections, would spell trouble for the 2024 presidential elections, and would undermine confidence in the dollar over the medium term.