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The US currency increases the profit as a rebound in the yield of treasuries. The dollar index is trading near three-week peaks. Since the markets are overly enthusiastic about the pace of the expected rate reduction of the US Federal Reserve, the "American" risks to rise even higher. This will happen if the speech of Jerome Powell at Jackson Hole on Friday will not be enough "dovish".
The appreciation of the dollar is likely to exacerbate Donald Trump. The appetites of the owner of the White House are growing the day before he demanded the Fed rate cuts by 100 basis points. As you know, the US President blames the rebellious Fed that the national currency does not want to decline. Is that the case?
Many global strategists have their point of view on this matter. Real profitability suggests that the dollar is supported by investors who fear a trade war. Thus, the US currency this year has risen in price against seven of the ten main competitors. The exchange rate growth occurred although the premium on the yield of Treasury securities adjusted for inflation compared to the debt markets of other countries has decreased since November.
The estimated 10-year real yield in the US slipped from its November peak by more than a percentage point to 0.03%. This is due to the easing of the Fed's monetary policy amid restrained inflation expectations. Financial markets fully estimate a further 1% reduction in interest rates in America by the end of next year. Since the beginning of August, the dollar index has risen to the highest level in the last two years, as traders and investors tried to find shelter in the currencies of the "safe haven" and gold. Markets are extremely concerned about the fact that the endless US-China trade dispute could lead to a recession in the world economy.
The dollar remains expensive, and this is quite normal, since Washington, in the person of Donald Trump, is waging a trade war with economies that have a surplus with the US, and make the "strong American economy even stronger," strategists write.
Investors have high hopes for the symposium and the G-7 summit on Friday. Activities, in their opinion, should clarify the prospects for interest rates in the United States and the consequences of a trade war. What if markets don't get what they want?
There are several signs that the Fed will take another dramatic step. For example, the head of the Fed of Boston, Eric Rosengren, who opposed the rate cut at the July meeting, made it clear that he was still not ready to support a freer monetary policy. The official also expressed confidence that the slowdown in global trade and the growth of the global economy will greatly harm the US economy.
Since all the attention of the markets is now focused on the speeches of Central Bank officials, they are likely to have to speak about the inversion of the yield curve. Although officials may reject the importance of this event. Given that Washington accused Beijing of currency manipulation, representatives of the Central Bank should warn about the risks associated with the currency war. The currency war is undoubtedly a continuation of the trade war. However, there is a big risk that it will end with the growth of public debt and rapid inflation, as it was in the 1970s.
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