Yellen’s Comments Take the Dollar Down

The US dollar is at its lowest level since last September after Fed Chairman Janet Yellen testified before congress. Bloomberg reports on the results of Yellen’s comments.

The dollar fell against all its Group-of-10 peers after comments from Federal Reserve Chair Janet Yellen on inflation spurred investors to lower their expectations on the pace of U.S. rate increases.

The Bloomberg Dollar Spot Index tumbled to its lowest level since September after Yellen told the U.S. Congress Wednesday “there was uncertainty about when and how much inflation will respond to tightening resource utilization”. The euro led gains on expectations the European Central Bank could send hawkish signals at its meeting next week while the pound also rose after the Bank of England’s Ian McCafferty suggested in an interview with The Times he favored faster unwinding of quantitative easing.

If the Fed follows through with a more dovish approach to monetary tightening they may be left behind in the Forex race to the top.

Now that economies are growing, central banks across the globe are unwinding their QE policies by raising rates and in the case of the Fed letting bonds come due and depositing the money back in the US treasury. Now the previous Forex race to the bottom is turning into a Forex race to the top.

To the extent that a too-strong US dollar hurts American exports it might be a good thing for American manufacturing to see the dollar slide a bit versus other currencies.

The American Economy and Inflation or Not

Raising interest rates is what the Fed does to stave off inflation. Years of quantitative easing have made money cheap to borrow and distorted markets. The Fed has been slowly raising rates and talking about reducing its bond portfolio in order to return the economy to a more normal footing. And investors have assumed that Donald Trump and the Republicans were going to follow through on their promises to stimulate the economy with tax cuts, infrastructure spending, repatriation of offshore corporate cash and deregulation. However, these promises have been slow to come as the White House is mired in political and legal disputes of its own making. Thus the inflation that was expected to come with healthy economic expansion is not happening and that is why the Fed is readjusting its plans for interest rate increases both in speed and in quantity. We wrote recently about how the US will not hit Trump’s 3% growth target without running the federal debt even higher than it is today.

The IMF calls Trump’s growth target unlikely and cuts their projection for US GDP growth for both 2017 and 2018 to 2.1%.

The world’s biggest economy will probably have a hard time hitting Trump’s target of 3 percent annual growth as it’s faced with problems ranging from an aging population to low productivity growth, and with a labor market already back at full employment, the fund said in its annual assessment of the U.S. economy released Tuesday.

As Yellen’s comments take the dollar down they are simply a verification of what is apparent which is that the US economy is growing so slowly that inflation is not a huge risk at the present time and as such the Fed is unlikely to move very fast or much farther in raising interest rates.