What market participants feared did not happen, the Fed did not begin to reduce the volume of monthly purchases of bonds. Moreover, the ultra-soft monetary policy will continue, and the head of the Fed, Jerome Powell, said that at any moment it could become even softer if the need arises.
What does this mean for the dollar exchange rate? Will it continue to decline further, or should we focus on the resumption of growth? Anna Zaitseva, an analyst at the FINAM Group, answered the question of Fortrader magazine.
– Maintaining the volume of asset buybacks by the Federal Reserve at the level of $ 120 billion per month will contribute, other things being equal, to the weakening of the US dollar in the medium term. It is important to note that the Fed has no plans to wind down its bond buying program until significant progress has been made towards achieving employment and price stability targets. Given the fact that inflation in the United States is well below the target range, low interest rates and generally supportive monetary policy will prevail for quite some time. In these conditions, many institutional investors (in particular, pension funds, insurance companies, etc.) in order to achieve the required levels of profitability will be forced to increase investments in risky assets and diversify them by currencies. This will contribute to further weakening of the US dollar.
At the same time, one should not forget that other large central banks also adhere to a policy of monetary easing, and strong national currencies are not at all profitable for them. For example, the Swiss National Bank has been carrying out foreign exchange interventions for quite a long time to prevent excessive appreciation of the franc. As a result, the SNB was even included in the list of currency manipulators compiled by the US Treasury. In addition, concerns about the strengthening of the euro and the yen were repeatedly expressed by the ECB and the Bank of Japan, respectively. Therefore, the trend towards a weaker dollar may be partially offset by the efforts of other central banks to contain the strengthening of their currencies.
It should also be borne in mind that changes in the prices of instruments in financial markets are cyclical, and when a correction starts on stock exchanges, the US dollar will be able to regain part of its positions. However, it is rather problematic to predict the exact time of the beginning of the correction.