While the main causes for these moves are due to the actions of the Bank of Japan and the European Central Bank, the market’s anticipation of tightening monetary policy from the US Fed has exacerbated the strength of the US dollar.
Fed speakers add fuel to the fire
Overshadowed by the usual noise accompanying the US employment report on Friday, four voting Federal Reserve bank members spoke at various venues. So too did Philadelphia Fed member Charles Plosser over the weekend and it was his comments, with his rather direct view on interest rates, that captured the most headlines. He said as the economy moves closer to the Fed’s goals, keeping interest rates near zero was a “risky strategy”. Adding fuel to the greenback’s fire, Plosser prefers they start to “raise rates sooner rather than later,” reinforcing the market’s hawkish view on US interest rates.
Richard Fisher, the Dallas Federal Reserve bank member, put one of the Fed’s aims rather succinctly when he said “a central bank is first and foremost charged with maintaining the purchasing power of its country’s currency”– hardly fighting words from the Fed. He went on to point out that the price of some components of core services, such as rent and household meals, increased at “the fastest rates” in a while, again sitting on the hawkish side of the fence.
Source: Federal Reserve Bank of Dallas
The times they are a-changing
With the asset purchasing program due to conclude in October and the FOMC meeting scheduled for next week, to be followed by its bi-monthly press conference, the timing is right for a change in rhetoric. I don’t think you can get much clearer signalling than what we got from Plosser over the weekend, when he added, in reference to borrowing costs staying low for a “considerable period of time”, that “this language is no longer appropriated or warranted”.
In this context it is likely the greenback could extend gains even further. And it appears the Fed knows there isn’t much it can do about it.
Jim Vrondas is chief currency strategist, Asia-Pacific at OzForex, a global supplier of online international payment services and a key provider of Forex news. OzForex Group Limited is a publicly listed entity with shares traded on the Australian Securities Exchange under the code “OFX”.