Investors eyeing the index that measures the dollar against its major peers are wondering if the currency has begun a new downward phase, a scenario that would give emerging markets some much-needed breathing space. The dollar index rose 7 percent in the 17 weeks post-mid-April. But in the last four weeks, it has fallen 1.7 percent.
The market is divided on the dollar. The bulls point to robust US data, comparatively weaker growth in other regions, the Federal Reserve’s steady interest rate path, the sustained impact of tax cuts and trade tensions as reasons the dollar’s strength is far from done. They further note how Fed governor Lael Brainard, looked upon as a dove, has shifted to a hawkish stance by asserting that government stimulus over the next two years would provide 'tailwinds to demand' that required further gradual rate increases.
The bears say not all the data are favourable, pointing out the August core inflation numbers that were lower than forecast. They also suspect that Donald Trump will tone down his trade rhetoric after the November midterm elections and they remind investors that because of fiscal stimulus the US is running sizeable twin deficits.
Written by Scherzando Karasu, External Financial Journalist
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