US Dollar steady as “higher rates
The US Dollar (USD) held steady on Friday, on track to end the week strongly after Federal Reserve Chair Jerome Powell cautioned the institution may need to raise interest rates further to ensure inflation is contained but pledged to proceed “carefully” at forthcoming meetings.
In a speech at a summit on the economy in Jackson Hole, Wyoming, Powell stated that policymakers would “proceed carefully as we decide whether to tighten further,” but he also made it clear that the central bank has not yet determined that its benchmark interest rate is high enough to ensure that inflation returns to the 2% target.
The U.S. dollar index, which compares the value of the dollar to six important foreign currencies, rose to its highest level since June 1 at 104.44 but then largely held constant at $104.06.
The index increased by 0.6% for the week and was on track to increase for a sixth consecutive week as signs of the American economy’s resilience lent credence to the notion that interest rates should stay higher for longer.
At Corpay in Toronto, chief market strategist Karl Schamotta said: “Overall, this is a slightly less hawkish speech than markets had feared.”
“We would argue that this is a good thing because conditions remain too uncertain for black-and-white messaging, and markets should welcome a more gradualist and incremental approach at this time,” Powell said in a statement. “Powell’s words lacked the drama associated with previous speeches from (Former Fed Chair Ben) Bernanke and (Former European Central Bank President Mario) Draghi, and even fell short of the directness found in his own appearances.
In interest rate futures linked to the Fed’s policy rate on Friday, there was a more than equal chance of a tightening at either the November or December policy meetings.
“We remain confident in our estimate for one additional 25 bp raise in November and 75 bp of reduction next year, beginning in June and continue at a quarterly cadence,” said the analysts at BofA Global Research in a note.
Investors have lowered their predictions for future rate hikes in both the euro zone and Britain as a result of this week’s disappointing business activity surveys, which have harmed both the euro and the pound.
Although the conversation is still ongoing, the pressure on the single currency has intensified as ECB members become increasingly concerned about weakening GDP projections.
