Is Fed really the culprit of the weakness of the USD? – Commerzbank

The reason for the significant strengthening of the US dollar (USD) in September, when Donald Trump’s second mandate approached, was obvious. It was widely anticipated that tariffs would increase prices for US consumers and that Fed would respond with an active monetary policy given the still robust real economy, that is, it could maintain higher interest rates for longer than it would require price increase. This argument gave the USD an impressive impulse, with the dollar index increasing almost 9% in just a few months, says FX analyst from Commerzbank, Michael Pfister.

The White House provides many reasons for the USD to weaken

“A series of surveys have indicated concern between consumers and companies, but there is still concrete data that supports the slowdown of the real economy. Although economic growth in the first quarter was weak, this was mainly due to advanced imports. However, employment creation remains robust and US consumers continue to spend despite the high levels of uncertainty. Fed is doing everything possible to look like a hard line. “

“An argument is that, although the Fed is expected to respond to the increasing expectations of inflation 1y1y, many market participants assume that inflation will increase drastically in the next 12 months and then decrease. They believe that US tariff Of the pandemic, it could be questioned if this would be justified.

“However, I suspect that this only partially explains the weakness of the US dollar. Presumably, the US dollar now reacts weakerly reacts to the growing risks of inflation because the cause of these risks lies in the White House. In addition to these inflationary risks, the White House provides many other reasons for the US dollar to weaken, such as the risk of imminent taxes on US investment erratic that hinders investment.