Strong US Data, Hawkish Fed and Geopolitical Worries to Support Dollar Bulls

Strong US Data, Hawkish Fed and Geopolitical Worries to Support Dollar Bulls

By Dilip Parmar

The Indian rupee marked the fourth weekly decline in a row following foreign fund outflows, hawkish Federal Reserve members’ comments and weaker regional peers. Emerging-market currencies declined for a second week, the first back-to-back retreat since October, signalling that investors are observing warnings that more aggressive rate hikes are likely.

The bond market finally got the Federal Reserve’s message on rates, while stock investors continue to ignore it, for the most part. As stock investors have been betting on a Goldilocks-like scenario, with growth remaining resilient and inflation cooling fast by the second half of the year. 

A gauge of the dollar gained for a third week, the longest winning streak since September. The turn in the greenback’s fortunes comes in the wake of strong US data and more hawkish commentary from Federal Reserve officials. US 10-year bond yield gained 10bps to 3.82%.

Global liquidity conditions remain the tightest they have been for several decades, continuing to pose a formidable headwind for risk assets and push safe-haven dollar demand upward. However, the median global real central bank policy rate remains deeply negative, even after rising from its near all-time lows of -5.5% to -3% due to higher inflations. 

What to Watch: 

Fed Chair Jerome Powell’s favoured inflation metric, PCE core services excluding housing rents, likely rose back above 5% on an annualised monthly basis, that unique information to the PCE report that will come this Friday. The big question is whether the recent data will cause the Fed to rethink the peak fed funds rate. FOMC meeting Minutes of the Jan. 31-Feb 1. The FOMC meeting likely will show just how strong the prevailing dovish sentiment is on the committee. Apart from the routine economic data and hawkish fed, geopolitical news will drive the forex market volatility higher. The meeting between US-China failed to tone down tensions, North Korea fired a barrage of missiles, and the Russia-Ukraine conflict all will bid well for the haven dollar. 

(By Dilip Parmar, Senior Research Analyst, HDFC Securities. Views are author’s own.)