The dollar index reached 101 points on Tuesday for the first time since March 2020, which may be influenced by rising U.S. Treasury bond yields. Investors appear to be awaiting a series of half-point interest rate hikes from the Federal Reserve as it tries to rein in rising inflation.
James Bullard, the St. Louis Fed chairman known for his hawkish views, said Monday that U.S. inflation is far too high, reiterating his case for raising interest rates to 3.5 percent by the end of the year.
Will the Fed accelerate interest rate hikes?
Last month, the Fed raised its target interest rate by 25 basis points, and forecasts released at the time indicated that interest rates could rise to 1.9 percent by the end of the year. Bullard's preferred path would require rate hikes of half a percentage point at all six remaining Fed meetings this year. James Bullard's remarks also included a statement that interest rates could rise by 75 basis points to accelerate the entire monetary tightening cycle.
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From a monetary policy perspective, there may be a strong divergence between the actions of the Fed and the rest of the central banks, including the Bank of Japan. This in turn may translate into currency rates, including the USD/JPY pair, which is trading at 128 yen per dollar.
Weakness of the yen beneficial for exporters
Since the beginning of the year, the yen may have lost 10 percent against the U.S. dollar, and more than 5 percent in April alone. In this situation, as calculated by Bloomberg, the yen seems to have lost the most against the dollar since 1971.
A weak yen theoretically can help the Japanese economy raise the inflation rate due to more expensive imports of products from abroad. It can support Japanese manufacturers who export their goods, potentially making them more competitive. Thus, for Japan, the current situation may be quite comfortable. Only inflation getting out of control would be an undesirable phenomenon.
SNB limits the appreciation of the Franc
The USD/CHF exchange rate recorded 12-month highs as the pair may be under pressure from a strong dollar despite potential interventions by the Swiss Bank. Current deposits at the SNB increased by CHF 2.2 billion in the week ending April 8 from the previous week, following an increase of CHF 5.7 billion in the previous week.
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The rise in deposits is widely seen as an indicator of the central bank's foreign exchange interventions dictating the amount of credit added to the sight accounts of commercial banks that hold freshly created francs in exchange for foreign currency. At its last meeting, the SNB stressed that it would limit the appreciation of the franc, which is near a 7-year high against the euro. This level was reached after Russia's invasion of Ukraine.
Daniel Kostecki, Director of the Polish branch of Conotoxia Ltd. (Forex service)
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