Trust Dollar Rally for now, but the bears will be back by Investing.com
By Yasin Ebrahim
Investing.com – The heyday of the dollar is likely to continue for quite a while, but eventually the Fed’s path will turn bleak again to get bears out of their hiding place.
The, which measures the greenback against a weighted basket of the six major currencies, rose 0.35% to 92.2 and is expected to post a gain in the third week.
“Certainly, the current moderate strength of the USD could continue for some time,” Commerzbank (DE 🙂 said in a note. The positive remarks come just days after the Federal Reserve maintained its benchmark rate, but released projections showing rate hikes in 2023.
“After the publication of the latest FOMC projections, the dollar was able to gain significantly”, [even as] the OIS market has been anticipating a first Fed rate hike for some time in 2023, ”Commerzbank said.
But the takeoff could happen even sooner, according to Federal Reserve Chairman of St. Louis, James Bullard.
“I’m putting us on from late 2022,” Bullard said Friday in a CNBC television interview. “[M]Your forecast was for 3% inflation in 2021 – core PCE inflation – and 2.5% PCE inflation in 2022.
“To me that would respect our new framework where we said we’re going to allow inflation to exceed target for a while, and from there we could bring inflation down to 2% at the next horizon, “he added.
Bullard’s hawkish tone did not scare the bond market as supply remained in place, but yields are likely to rise, albeit gradually, which will add another tailwind for the greenback.
“We expect the yield on 10-year treasury bills to gradually increase in the 2.25% to 2.75% range by 2022 from the current 1.5%,” he added. Wells fargo (NYSE 🙂 said in a note.
“The US Federal Reserve’s near-zero federal funds interest rate target is unlikely to change over the next 18 months, but at some point in this period our central bankers will likely start to imply that they will start to reduce (or “decrease” in the language of the Fed) the amount of bonds they buy on the open market each month out of the current $ 120 billion, ”he added.
But for those hoping this could be the end of the dollar bear market, think again. The fate of the dollar is tied to the Fed’s policy actions and the central bank’s inflation outlook. This outlook may need to be revised as winter approaches, as inflationary pressures may ease.
“Only when inflationary pressures subside significantly again in autumn and winter […] if the Fed starts to fear again that permanent reinflation will eventually materialize, ”Commerzbank said. “This should make the Fed’s normalization less certain again and weigh on the dollar again. We expect the dollar to weaken again from then on. “
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