King Dollar Continues to Rally as Fed Hawkishness Continues

Source: Forex News

Early this month, the Federal Open Market Committee (FOMC) held its meeting. As expected, the officials left interest rates unchanged but predicted that a hike would come in a near future. In the meeting, they left rates unchanged between 1.5% and 1.75%. Yesterday, the officials released the minutes of the meeting.

The minutes showed that the officials were optimistic that a rate hike would come in June. The statement said:

“Most participants judged that if incoming information broadly confirmed their current economic outlook, it would likely soon be appropriate for the Committee to take another step in removing policy accommodation.”

In their March meeting, the officials increased rates for the first time this year and predicted two more hikes for the year. Other officials predicted that they would hike three more times this year.

The officials started the meeting by looking at the dollar, equities, and the bond market. The dollar has been strengthening in recent months as other central banks turn dovish on rate hikes. The stocks were then trading lower as investors worried about the upcoming regulations on the technology companies.

The talk of regulating the industry was in response to information that Facebook had allowed developers to access user data. They were also lower because of the ongoing trade issues. On bonds, the officials explored the reasons why treasuries had soared in the recent weeks. The key reason was the increased global uncertainties and the increasing deficit. It was also attributed to increased inflation compensation.

In recent months, inflation in the United States has moved closer to the Fed’s target of 2.0%. In July last year, the CPI grew at an annualized rate of 1.6%. Since then, it has been rising and early this month, the CPI rose at an annualized rate of 2.5%. This was the highest level since March last year when the rate was at 2.7%. In the minutes released yesterday, the officials said that they would let inflation cross their 2% target. Specifically, they said they would: ‘leave the benchmark rate “at or above their estimates of its longer-run normal level before too long.’

The minutes also showed that there were concerns about some officials on how to change the forward guidance. For years, the Fed has used the forward guidance to prepare traders of their next moves. As such, with the inflation nearing the target, some participants noted it might soon be appropriate to revise the forward-guidance language in the statement.

In recent months, the dollar has gained significantly against its major peers. This is shown in the chart above that compares the dollar index with its major peers. As shown, the dollar index has gained by almost 5% in the past three months. On the other hand, the euro, pound, and yen have lost by 5%, 4.92%, and 2.83% respectively. Recent data from these countries has continued to show some weakness. This means that the dollar’s bullish run could continue for some time.

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