16:55 GMT +324 September 2017
Live
    US Dollar

    US Dollar Drops to 10-Month Low Due to Policy Uncertainty

    CC0
    Business
    Get short URL
    0 638130

    The Federal Reserve’s uncertainty of US inflation and economic growth, and delays in fiscal stimulus implementation have produced a decline in the US dollar’s FX rate against a basket of its 10 peers, particularly as the Fed’s optimistic view of the economy contradicted the tepid data.

    Kristian Rouz – After the Fed Chair Janet Yellen’s testimony before Congress, the US dollar slipped to its lowest since September against the basket of currencies as uncertain Fed policy outlook, as well as lack of detail on the Trump administration’s fiscal stimulus rendered traders and investors increasingly cautious.

    The US economy is currently not in its best shape. However, Yellen provided a rather optimistic view of its state, while the standoff within the Republican Party over tax cuts and next year’s budget hardly added certainty regarding the direction of broader US economic policy.

    Yellen said before the Congress on Wednesday that the central bank is lacking certainty of whether the US inflation, one of the key macroeconomic indicators, is going to reach the Fed target of 2 percent. Currently at 1.6 percent last month, US inflation eased from its previous reading of 1.7 percent year-on-year, rendering thwe Fed tightening cycle increasingly unsustainable and stirring concern of an economic slowdown.

    “There was uncertainty about when and how much inflation will respond to tightening resource utilization,” Yellen said in her Congress testimony.

    The Federal Reserve, meanwhile, released one of its key macroeconomic surveys, known as the Beige Book, in which central bank analysts observed that US worker compensation and gains in consumer prices remain tepid despite the ‘full employment’ situation in the labour market. The data added uncertainty to investor perception of the US economy, and contrasted Yellen’s overall optimistic assessment of the state of affairs in the world’s largest economy.

    “The majority of districts (governed by regional Federal Reserve banks) expected modest to moderate gains” in the pace of GDP expansion in the near-term, the Beige Book, released on Wednesday, read. Gains in job creation, however, remains “modest to moderate”, the Fed analysts said, while inflation “continued to rise modestly in the majority of districts.”

    US inflation is poised to drop to 1.4 percent this month, the Beige Book said, which contrasts the positive dynamics in the labour market. In 2010, US unemployment rate stood at above 9 percent, inflation was roughly 1.5 percent year-on-year, and as employment situation has improved through the years ever since, US inflation, after having dropped dramatically in early 2015 in line with the slump in energy prices, has remained weak and well below the Fed 2-percent target.

    “If US prices continue to decline, it’ll be hard for the markets to sustain the current mood toward monetary tightening, and some markets are already starting to feel that now,” Daisuke Karakama of Tokyo-based Mizuho Bank Ltd. said.

    The Federal Reserve have hiked base borrowing costs four times starting in December 2015, and are on course to undertake another hike till the yearend, as well as commence decreasing their bloated balance sheet. These measures are seen as a preparation for the White House’s fiscal stimulus package, which is poised to become the main driver of the US economic expansion in the coming decade, according to President Donald Trump’s plan.

    However, as the fiscal package is still subject to delays, a continued tightening on the monetary side would mean a further economic slowdown and an even weaker inflation, hence the rising scepticism of the US dollar, which is now declining against the basket of the world’s 10 major currencies.

    US central bank, Yellen said, is closely “monitoring” the inflation developments, and expressed her confidence that the economy will continue to grow in the coming years, ruling out any speculation of a looming recession. The Fed will therefore keep raising interest rates to bring monetary conditions in line with normality at above 5 percent, as well as cutting the $4.5-trillion balance sheet.

    Goldman Sachs analysts said in a note released after Yellen’s testimony on Wednesday that they expect the central bank to undertake another interest rate hike in December, as the Fed are likely to take a break and watch whether inflation and broader economic growth will rebound in line with labour market developments. An interest rate hike in September in unlikely, Goldman observed – another factor behind the dollar’s weakening.

    Typically, a national currency faces higher demand ahead of monetary tightening steps, and anticipated Fed delays are not encouraging a higher demand for the dollar.

    Historically, the Federal Reserve would undertake rate hikes once a quarter, but the current tightening cycle is characterised by a very gradual pace of policy adjustment, with wide gaps between hikes, between six and twelve months. Such a situation also does not contribute to a precise policy transmission to the economy, meaning the central bank’s grip on the situation is weaker than it used to be in the past decades.

    Related:

    US Dollar Overvalued by Up to 20% - IMF
    India Scraps One Billion Dollar Deal of Multirole Helicopters With Sikorsky
    Russian, Chinese Gold Reserves to Cut Global Economy's Addiction to Dollar
    US, Vietnam Reach Multi-Billion Dollar Trade Deal During Prime Minister's Visit
    Tags:
    dollar, Federal Reserve System, Donald Trump, Janet Yellen, United States
    Community standardsDiscussion
    Comment via FacebookComment via Sputnik
    • Сomment