Central Banks, Rising Rates, and Inflation Surprises
- Currency-sensitive investors grappled with an onslaught of political events, central bank meetings, and the release of various economic data points.
- The U.S. Federal Reserve raised the Federal Fund’s Rate for the third time in six months on Wednesday, despite some concerns that the economy is faltering.
- The U.S. dollar ended only slightly higher against a basket of currencies.
On June 8, the European Central Bank (ECB) left rates unchanged for the region. Mario Draghi, ECB President, said a substantial degree of monetary accommodation was necessary for the Eurozone. He also reaffirmed the ECB’s preparedness to increase its asset-purchasing program, despite the recent pickup in growth. The U.S. dollar gained ground against the euro but faced pressure later that day when James Comey, former director of the Federal Bureau of Investigation (FBI), gave testimony on his interactions with President Trump and the ongoing investigation into the Russian probe. These concerns pose just another potential hurdle for President Trump’s pro-growth agenda and the reflation trade.
The U.S. Federal Reserve (Fed), on the other hand, decided to increase interest rates – as was widely expected. The morning of the Fed’s announcement, Consumer Price Inflation and retail data came in slightly lower than expected, causing the dollar and Treasury yields to nose dive. However, the Fed gave no signals that these signs of economic weakness would delay its tightening plans. In addition, the Fed signaled that it would also take steps to begin reducing its balance sheet this year. The dollar recovered and ended slightly higher against a basket of currencies.
Currency Movements Are Hard to Predict
Source: Bloomberg, 4/25/17–6/14/17. EUR/USD Spot Exchange Rate where the price of 1 euro is in U.S. dollars. The calculation is the one week percentage change in spot exchange rate where a negative value is the depreciation of the euro. JPY/USD Spot Exchange Rate–price of 1 Japanese yen in U.S. dollars. The calculation is the one week percentage change in spot exchange rate where a negative value is the depreciation of the JPY. The U.S. Dollar Index (USDX) indicates the general international value of the USD. The USDX does this by averaging the exchange rates between the USD and major world currencies. A negative value indicates a general depreciation of the dollar.
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