COLUMN-Far from debasement, dollar hits overdrive: Mike Dolan

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(The author is Editor-at-Large, Finance and Markets at Businesshala News. Any views expressed here are his own)

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LONDON, Nov 12 (Businesshala) – Wasn’t rising inflation weakening the US dollar?

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However, the opposite happened this week as news of a surprise rise in US inflation and inflation expectations hitting the highest level in decades pushed the US dollar against currencies around the world.

The dollar’s main index rose to its highest levels for the year as the euro and sterling, which account for 58% and 12% of that index, respectively, fell to 2021 lows.

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For some, it meant nothing.

There is a long-standing narrative that more easy Fed money through the purchase of Fed bonds and the seemingly endless creation of new dollars will ultimately fuel inflation and undermine the greenback as the kingpin of the world financial system. .

All things being equal, higher consumer inflation should be bad for the currency as it means people can buy less goods and services for their coin. Permissions to grow rapidly, rising prices and the resulting hyperinflation have in the past effectively rendered national currencies worthless.

The fear of a so-called ‘dollar debasement’ has been the stuff of gold bulls for decades, and many have been demanding a return since the gold standard was abandoned 50 years ago. Recently, cryptocurrency evangelists have taken the cuddle.

Still, the failure of bitcoin or ethereum to be upbeat about Wednesday’s US inflation shock underscores how weak the argument is as an inflation hedge to buy the cryptocurrency.

And even though gold has risen this week, it remains in the red color throughout the year. Fed critics such as the longtime gold bug and Euro Pacific Capital’s Peter Schiff were left scratching their heads as to why the dollar was rising.

“Today’s dollar rally makes no sense,” Schiff tweeted on Wednesday. “The fact that the dollar is losing purchasing power much faster than expected does not make the dollar more valuable.”

So what gives?

Naturally, this is all just relative. Even if confidence in the Fed is in question, Forex maintains that any loss of a bank’s credibility only matters if it is more or less than any other central bank.

And more positively still, it all comes down to the basics of where you expect US interest rates and inflation to be relative to their major peers a year from now.

dollars in your pocket?

This week’s slide in the world’s leading euro/dollar pair dropped to its lowest level since July 2020, as inflation data widened the one-year interest rate differential in favor of the dollar. It is now up about 20 basis points to 0.9% in just three weeks.

The Fed will now hike policy rates at least twice through the end of next year, starting in July. The European Central Bank’s price hike is barely a small one, but ECB officials insist a rate hike next year is highly unlikely.

Whether these rate premiums cover the expected inflation gap is less clear. They are just shy of a one-year horizon – but given the relative inflation swap market, they comfortably cover the risk on the 5-10 year view.

And more immediately, the US economic data surprising consensus forecast is still more positive than deeply negative surprises in the euro area. In fact, the gap between the US and Euro economic surprise indices compiled by Citi is more positive in favor of the United States than at any other point since October last year.

Even though Fed critics like Schiff doubt that the Fed will be ready to tighten to the extent that the market now thinks, more mainstream investors think the Fed will react next year and reassess those expectations more than other central banks. There’s a lot more room to start. ,

Leander Galli, senior portfolio manager at Amundi’s global fixed income team, believes that neither high US inflation is fully priced in the market over the long term nor the degree to which the Fed is able to control it. will work for

“The longer the Fed waits, the faster it will eventually have to go.”

So is today’s sharp inflation the start of a bigger ‘debacle’ or the impetus for more attractive returns?

As always there are myriad arguments back and forth.

What it misses is the sometimes exhausting debate over the US Treasury’s projected ‘strong dollar’ policy – ​​a clip chanting that ‘a stronger dollar is in US interests,’ which former Treasury Secretary Robert Rubin reiterated in the 1990s Was. Did Washington weaken the dollar for trade gains?

Subsequent Treasury secretaries often tied themselves in knots over the words – often unwittingly advancing statements as to whether this meant a stronger dollar in your pocket through lower inflation or a tightening on world money markets.

This week at least, it’s definitely the latter.

By Mike Dolan, Twitter: @reutersMikeD; Editing by David Clarke and Steve Orlofsky

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