Recently, the U.S. dollar index has surged to 96, reaching its highest point since July of last year. This rise has sparked considerable attention among financial analysts and market strategists alike.

Moreover, the anticipation for interest rate hikes is intensifying as if ignited by a flaming torch. The Federal Reserve may find itself compelled to raise rates to 3%, or even higher under extreme conditions.

Previously, the U.S. Treasury market largely expected a peak interest rate of only 1.75%. In contrast, the current sentiment points towards a daunting 3%-4% range, creating unease among market participants who are reassessing their investment strategies for a looming market adjustment.

So, what exactly is the Federal Reserve planning? How will dollar liquidity be affected? Are we witnessing the Fed preparing for a decisive battle against inflation?

Dollar liquidity is undoubtedly undergoing transformation. Last week, the U.S. dollar circulation report noted that the repo market had experienced negative rates of -0.01% for the top 1% of repos.

Just the prior week, it had returned to positive rates, only to dip back into negativity within days. This indicates that arbitrage activities are persisting within the Treasury market, further contributing to scarcity in certain categories of government bonds.

Investors appear willing to cling to cash to secure government bond spots, suggesting some entities are indeed facing difficulties and engaging in deleveraging operations.

Additionally, there is the potential for Treasury basis arbitrage and yield arbitrage, with certain hedge fund activities regaining momentum in the market.

Current Treasury yields in the U.S. have reached new highs for one, two, and three-year bond offerings, highlighting the urgency within this market.

The inversion of yields for one-month Treasury bonds compared to three to six-month offerings signals an unusual disconnect, primarily driven by inflation concerns.

The Federal Reserve's prior misjudgment regarding inflation trends has inflicted severe pressure on itself and the broader economy.

Inflation in the U.S. is climbing to historical peaks, compounded by a supply chain crisis that shows no signs of immediate improvement.

With soaring oil prices and an approaching winter exacerbating supply shortages across various commodities, preparations for the holiday season appear increasingly uncertain.

From both economic and political perspectives, the leeway remaining for the Federal Reserve to continue its expansionary policies is rapidly diminishing. Action cannot be postponed any longer.

If inflation trends continue to spiral downward, the Federal Reserve might be forced to raise interest rates sooner, leading to even more significant impacts on the market.

A wave of change, intensified and rapid, is anticipated. This has become the fundamental reason for the unrest and concern within the dollar and U.S. Treasury markets.