Forex analytics. The dollar will find the strength to recoup – ForexNews.PRO
Donald Trump dreams of a 1% federal funds rate, a weak dollar, and new stock index records. To do this, the US president intends to fill the FOMC with “pigeons” led by the new Fed chairman. However, in fact, the titanic efforts of the owner of the White House can bring exactly the opposite result.
Despite the fact that the Fed controls short-term rates, its actions and expectations of these actions affect Treasury bond yields. The cost of servicing the national debt depends on it. Scott Bessent intended to reduce it to 3% for 10-year securities when he took office as Finance minister as part of his 3-3-3 policy. The other two three related to oil and US economic growth.
Expectations of an aggressive reduction in the federal funds rate in a strong economy may lead to an increase rather than a decrease in treasury yields. Investors will be scared by the risks of uncontrolled inflation, as it was in the 1970s. Then, under pressure from President Richard Nixon, Fed Chairman Arthur Burns began actively easing monetary policy. This led to a spike in prices, and subsequently to a double–dip recession in the US economy.
Stock indexes and the US dollar are extremely sensitive to the dynamics of Treasury bond yields. Rising interest rates on treasuries will increase the costs of S&P 500 companies, reduce their profits and lead to a pullback in the stock market. The greenback risks strengthening, as American assets will look more attractive to foreign investors. This will lead to an overflow of capital to the United States and to an increase in the USD index. So, during the Christmas week, he scored the worst result since June against the background of falling bond yields.
Thus, even if the US dollar suffers in the short term due to the filling of the FOMC with “pigeons”, it will be ready to recoup later. In addition, you need to understand that the Fed chairman, although he has a serious influence on the FOMC, he is not the only warrior in the field.
The US dollar may be supported by strong data on the US economy, which will force the Fed to extend the pause in the cycle of monetary expansion. The futures market estimates the chances of March at 51%, however, a shift to April will keep the yield spread of American and German bonds wide and support the “bears” on the EURUSD.
