The U.S. dollar continued to hover near three-month highs in early European trading on Monday, bolstered by expectations of an economic recovery and rising yields on U.S. government bonds. Following a recent speech by Federal Reserve Chair Jerome Powell, traders are betting that there will be more interest rate hikes sooner than expected, which is driving the current strength of the dollar.

The U.S. currency index (DXY), which measures the greenback’s value against a basket of six major currencies, remained steady at 92.18. This represents its highest level since November 2020, with gains of almost 2% since Mr. Powell’s speech on March 4th.

In his speech, Mr. Powell stated that the U.S. economy was poised for a strong rebound, and the central bank would remain accommodative until inflation and employment targets were met. However, he also acknowledged that the recent rise in bond yields was due to the market’s expectations of stronger economic growth and higher inflation.

The yield on the benchmark 10-year Treasury note has surged in recent weeks, hitting 1.75% last week for the first time since January 2020. Rising bond yields reflect investors’ views that interest rates may have to rise sooner than the Federal Reserve had previously indicated, leading to increased demand for the dollar.

The U.S. is one of the few countries where interest rates are expected to rise in the near term, as Europe and Japan remain mired in negative rate policies. This divergence in monetary policy outlook is likely to provide ongoing support to the dollar.

Furthermore, the fiscal stimulus package currently being considered by Congress is likely to add further momentum to the U.S. recovery. The relief package, which is expected to be passed this week, will provide a boost to consumer spending and support economic growth.

The combination of rising bond yields and an improving economic outlook has resulted in a resurgence in investor interest in U.S. assets. The dollar has been the primary beneficiary of this trend, strengthening against the euro, sterling and yen in recent sessions.

In addition, vaccination progress is making a positive impact on markets. The U.S. is ahead of Europe in vaccine distribution, with around 10% of the population fully vaccinated compared to around 4% in the European Union. The successful rollout of the vaccine is enabling the U.S. to reopen more quickly, leading to higher levels of consumer spending.

However, some analysts are warning that the dollar’s strength may not last indefinitely. They note that while U.S. economic growth prospects are looking positive, other countries are also likely to recover this year, which could erode the dollar’s attractiveness as a safe-haven asset.

There is also a risk that rising inflation could cause the Federal Reserve to shift its interest rate policy, which could lead to a reversal of the current dollar strength. While Mr. Powell has indicated that he believes the recent inflation spike will be temporary, if inflation continues to rise, the Federal Reserve may have to reconsider its stance.

Moreover, the global economic recovery may pose a challenge to the dollar’s dominance. As Europe and Asia start to recover from the pandemic, their currencies could start to appreciate against the dollar, reducing its relative value. In addition, the ongoing geopolitical tensions between the U.S. and China may have long-term implications for the dollar’s role as the world’s dominant reserve currency.

In conclusion, the dollar’s strength is likely to continue in the near term, driven by an improving economic outlook, rising bond yields, and a divergence in monetary policy. However, the longer-term outlook for the dollar is less clear, as geopolitical tensions and the global economic recovery could weaken its position. Traders should keep an eye on developments in key markets, including the U.S., Europe, and Asia, in order to assess the future prospects for the dollar.