The U.S. Dollar has overturned the consensus idea of the weakening Greenback that seemed to capture investors’ minds in the financial market. Negative factors that pressured the American currency before suddenly turned to a positive upside are discussed below.
The loose monetary policy of the Federal Reserve (Fed) and a new fiscal stimulus package of $1.9 trillion should, in theory, increase the supply of Dollars and this should eventually lead to a weaker Greenback. It is expected that neither the Fed nor the U.S. Treasury would make any efforts to stop this process or even suspend it in coming months even if there are clear signs of macroeconomic recovery and resumed growth on the horizon. Not even higher inflation triggered by new vast stimulus measures is thought to scare the U.S. Administration.
Such factors are commonly considered as negative for the Dollar. But it seems this time investors believe that a possible inflation spike may push the Dollar to extremely high values and this may push Treasuries’ yields even higher. Under such conditions it is likely that the U.S. Dollar would be in even greater demand and may rise against other currencies.
Paradoxically, it looks like new fiscal stimulus measures are acting on the side of a stronger Dollar too. After all the Fed is not injecting new money into the economy as it did in 2020, but the government. As a result, this money is expected to be taken from higher taxes or additional borrowings. The second option is more likely, but would most likely lead to higher yields.
Moreover, the U.S economy is performing well according to recent NonFarm Payrolls data. The positive dynamics in the U.S. labour market assist American asset prices, which are denominated in the U.S. Dollars. Finally, the U.S. Dollar is seen to be heavily oversold against other currencies, forming an upside potential for the Greenback.
So, core Consumer Price Index (CPI) data, that is to be released on Wednesday, is of particular interest in this regard. If the inflation readings turn out to be higher than expected, it may prompt the yield to resume climbing above 1.6% on 10-year Treasury notes. This may trigger the rally in the Dollar with rising U.S. Dollar index to 92.8 points.
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