The Buck has been on a slide since The China Virus arrived in the US and the change in the Fed’s approach to inflation is applying more Southside pressure on the dollar into the future.
USD has depreciated over the course of the Summer, with the US Dollar Index falling to 92 at the end of August. Although USD has staved off further declines, our Fx desk analyst says a weak Buck may be here to stay.
Markets are in broad consensus that low yields will be in play for yrs to come within the G-10 space, meaning the Fed is not opening the Buck up to any pressure.
Morgan Stanley’s global investment committee agrees with us that a weaker dollar is an “underappreciated” impact of the Fed’s policy changes, noting that a weaker USD may be a means for achieving higher inflation.
“A weaker dollar exacerbates inflation because it drives up the cost of imports, especially commodities and consumer goods that are major inputs to US consumption,” a Morgan Stanley’s Fx analyst wrote on 8 September.
As the world’s reserve currency, USD presents the Fed with this challenge: prioritizing domestic monetary policy but maintaining awareness of the spillover effects from dollar dynamics.
The Fed has had a close eye on USD liquidity since the beginning of the virus chaos.
In the Spring, USD dove and spiked us on concerns over a global shortage of USDs. After the Fed flooded the world with Buck volatility faded before market factors began pushing it South.
A weaker dollar presents challenges for countries now watching their currencies appreciate which generally harm exporters. The European Central Bank has watched the Euro rise over 5% against the US dollar since July, prompting ECB President Christine Lagarde to say Thursday that the ECB will closely monitor the situation.
Policymakers abroad may want to buckle in for a long period of dollar weakness, as normalization will not be occurring anytime soon.
The level of appreciation in other currencies depends on other risk factors. For example, in the UK, the lingering uncertainty around BREXIT has the market predicting GBP/USD to rise to 1.45 by August 2021. In comparison, it predicts more stability in EUR/USD, with a 12-month target of 1.22.
Have a healthy day, Keep the Faith!