All eyes are on Fed Chair Janet Yellen as she attempts to introduce inflation to the U.S. in a slow and controlled manner.
Currency analysts are predicting a greater weakness in the greenback in the wake of the Federal Reserve closing the doors on a possible hike in interest rates through spring leaving the USD with a welcome stranger – inflation.
Fed Chair Janet Yellen’s cautious statement after the Fed’s policy meeting in March has been read by analysts as setting a rough patch for the USD, especially with inflation nipping at its bud.
Yellen cautious approach is gradually introducing inflation in the U.S. economy with the result that the core Consumer Price Index is set to rise by 2.3% in the next 12 months, marking its biggest increase since May 2012. The core personal consumption expenditures price index, the Fed’s preferred measure, gained 1.7% in the 12 months ended in February.
The core personal consumption expenditure price index excludes food and energy prices. Janet is targeting a core PCE reading of 2%.
According to a research report from Fundstrat Global Advisors, differences in inflation rates between the United States and the Eurozone have acted as a prime factor behind the greenback’s strength. Inflation typically erodes the value of a currency.
Although expectations of higher inflation had earlier given rise to hopes of a faster rise in inflation rates, which in turn would have boosted the dollar, the perceived unlikely probability of a Fed hike, until at least June, has reinstated inflation’s traditional garb of eroding the greenback’s value.
“If inflation in the U.S. is relatively high, but interest rates aren’t expected to move higher… that doesn’t ultimately bode well for the dollar,” said Shahab Jalinoos, global head of FX strategy at Credit Suisse in New York.
Jalinoos expects the Euro hit $1.17 against the dollar within a span of 3 months.
Another foreign exchange strategist, Ian Gordon, from the Bank of America Merrill Lynch in New York, opines that the Fed could wait a little longer for raiding interest rates, even if the PCE reaches its 2% target. This could be because Fed Chair Yellen had expressed scepticism last month over sustaining current inflationary trends.
Investors have to be cautious in their long term dollar holding position “over the coming months until we get more evidence that the pickup in inflation is sustainable and the Fed is going to respond to it.”
The USD has an advantage since Japan and Europe have extremely low yields since they follow an ultra-accommodative monetary policies. Despite this, the dollar has fallen on the view that the Fed would not be able to follow through with four interest hikes a year. Confirming analysts scepticism, the Fed has cut the interest rates hike to two per year.
The dollar index, which measures the greenback against a basket of six major currencies fell by 4.1% in the first quarter of this year which is its biggest quarterly percentage fall in the last five and a half years.
Categories: Economy & Finance, Strategy
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