How high inflation and no rate hike is going to affect the dollar?
When talking about currency trading, USD is at the heart of it. The greenback makes the market move. When you look at the chart of DXY, you see that throughout 2021, the dollar has maintained its safe-haven characteristics.
But as the world is recovering from COVID-19, high inflation is creeping up the global economy.
Let’s find out how high inflation and no rate hike will affect the greenback.
How inflation affects currencies?
Before going further, it’s important to mention how inflation affects currencies’ value.
Inflation raises the price of products, reducing the number of goods and services that you may purchase with a dollar in the future vs. a dollar now.
So, if an orange costs $1 today, it’s likely that the same orange may cost $2 one year from now.
How inflation and a rate hike is impacting the dollar?
When discussing inflation, it is important to bring up the Federal Reserve. Monitoring and controlling inflation is one of the Federal Reserve’s primary tasks.
While the Fed is already reducing its asset purchases, increasing inflation may compel it to raise interest rates sooner than predicted.
However, rate rises may not be enough to reverse inflation since the drivers of inflation entail supply chain bottlenecks and fiscal expenditures, both of which the Federal Reserve has little influence over.
If inflation does not fall, the Federal Reserve may be forced to taper faster and raise interest rates, which can impact the greenback.
Recently, the Federal Reserve has hinted it is ready to accelerate its tapering process.
A speedier reduction in bond purchases suggests that borrowing costs may rise sooner than projected, possibly in May. Powell’s hawkish stance, which his colleagues backed, propelled the dollar higher.
While the US economy added just 210,000 jobs in November, half of what was expected, some encouraging signs were. The unemployment rate declined to 4.2%, and participation increased, which were favorable outcomes. As a result, the dollar fell for a brief while before recovering its footing.
Along comes the Omicron
Omicron, a novel COVID-19 strain, was discovered after worrisome signs of a rapid spread in South Africa. However, following the initial market panic, the news of the strain became less problematic.
Pfizer executives were quite calm and confident that Omicron could be handled, whereas rival Moderna raised concerns.
Omicron is more infectious than prior versions, although there is still some doubt concerning fatality and vaccination resistance. Markets appeared to respond to every bit of news, favorable or negative.
While markets fluctuate simply in response to viral news, the dollar’s movements were more complicated.
The dollar gained from safe-haven flows versus commodity currencies, but it failed to make large gains against major currencies due to declining rates.
Overall, the greenback finished higher due to the Fed rather than the virus.
So, what’s next?
The Fed’s blackout period has begun, but conjecture about the bank’s intentions continues. The November inflation statistics might solidify the decision to expedite tapering and influence the magnitude of such a move.
Currently, the Fed cuts the number of monthly purchases by $15 billion every month.
Will it accelerate the pace to $20 billion, or perhaps $25 billion? Data from the Consumer Price Index (CPI) might assist decide the decision, which would impact the timing of the rate rise.
The impact of lowering oil prices will most likely be seen only in December, as will the cut in transportation costs. In addition, Americans are purchasing both online and offline, which adds to pricing pressures.
If existing vaccination strategies fail to protect against Omicron, markets may suffer, increasing the dollar.
Evidence showing vaccinations retain a high success rate even against this version, on the other hand, may send the greenback down.