USD: Fed is becoming more concerned by risks from low rates – MUFG

Lee Hardman, Currency Analyst at MUFG, notes that the US dollar has rebounded overnight as choppy trading continues in the near-term as the rebound for the US dollar was triggered by yesterday’s speech from Fed Chair Yellen which had a hawkish tone.

Key Quotes

“The 10-year US Treasury bond yield has also bounced off support from its 55-day moving average at just above 2.3% offering more support for the US dollar as well. In her speech Fed Chair Yellen stated that the US economy is “close” to meeting their dual objectives, and that global uncertainties “are a little bit less worrisome than they have been in recent years”. It supports the Fed’s updated outlook presented last month that it plans to raise rates “a few times a year” through to the end of 2019. From that perspective the comments should not really come as a surprise to the market.”

“More interestingly, Fed Chair Yellen warned that the US risks a “nasty surprise down the road – either too much inflation, financial instability or both” if it waits too long to begin moving their key policy rate towards the neutral rate which is currently estimated at around 3%. Her comments signal that the Fed’s assessment of risks appears to be shifting. It is becoming more concerned over the risks of waiting too long to raise rates rather than the risks of raising rates too soon.”

“The release yesterday of the latest US CPI report for December provided further reassurance that inflation is likely to return to their goal. The annual rate of headline inflation accelerated further to 2.1% reaching its fastest rate since June 2014. The rebound in energy prices is helping to lift headline inflation back into line with core inflation which has averaged an annual rate of 2.2% in 2016 which was the fastest rate since 2009. The combination of rising inflation pressures and the US economy’s return to more solid growth will keep pressure on the Fed to raise rates more quickly in the coming years even without taking into account the potential stimulative impact of President elect Trump’s policies.”