The markets remain buoyant while the dollar index is developing a pullback to the years lows as Fed officials continue to calm inflation fears.
The Feds ViceChairman Richard Clarida reassured that the regulator could overcome the spike in inflation and provide a soft landing without breaking economic growth. People with experience in the markets may remember that the Fed said the same things about 15 years ago, intending to cool the housing boom and overheated economy.
Without going into assessments of the correctness of such a policy in the long run, it is worth remembering that those years were accompanied by a strong recovery in stock markets and pressure on the dollar.
The world may now roughly repeat that story when the DXY lost 30 in two years with just minor pullbacks. Building on the past, we should expect pressure on the US currency to develop as long as the Fed focuses on economic growth rather than fighting inflation.
Of course, this is no reason to expect a pullback of the Dollar Index from 100 points 2020 peak to 70 in the coming months 20 from current levels. Those would be levels below the historic lows of 2008 when the DXY was as low as 71. It is more reasonable to expect a much softer scenario but with similar trends.
The need for developed countries to continue their soft monetary policy line strengthens demand for emerging market currencies. In particular, the Chinese renminbi this morning rewrote 3year highs against the dollar, slipping below…