Interest rate doubts put pressure on dollar

Currencies Direct August 21st 2015 - 2 minute read

Doubts that the US Federal Reserve will raise interest rates in the near future added pressure to the US dollar this week (17 – 21 August), allowing the euro to climb to a seven-week high against the Greenback.
Investors now believe the probability that the increase – which would be the first in almost a decade – will happen in September is around 40%, with many abandoning the dollar after minutes from the Federal Open Market Committee meeting, released on Wednesday, 19 August, contained nothing that suggested the rise is on the horizon.
At the end of July, the probability of a rise was set at around 50%, indicating that traders are losing confidence.
The number of US unemployment claims was released yesterday and they were encouraging. They’re evidence of a strong labour market and a robust economy, but even though conditions seem right for a rate rise the Fed continues to be non-committal.
Former Fed research director David Stockton explained to Reuters that while this data is positive, inflation really holds the key to how far the central bank can go in lifting borrow costs. He believes it would be a "leap of faith" to raise rates without seeing evidence that prices are moving up.
"There is a big component of inflation that is just going to be idiosyncratic and unexplained," Mr Stockton said. "If inflation is not moving back to target… then [Fed Chair Janet Yellen] can argue for a go-slow approach."
Inflation did not fall as much as expected in the 2007-2009 US recession, and it hasn't risen as much as it was predicted to during its recovery. This has led many analysts to believe that it may now be hard to budge.  
Michael Owyang, assistant vice president of the St Louis Federal Reserve Bank, said: “There has been a lot of new research. Volumes of new research. And I am not sure there is a consensus about how policy affects inflation at the zero lower bound. Inflation dynamics have changed.”
When we last looked, the dollar index was down 0.35%, while the Greenback was down 0.3% against the yen. But the pound shed 0.05% against the US dollar.
On Thursday, the euro rose against many of its major peers, adding 1% against the dollar – its best position since 30 June – because of turmoil in the emerging market currencies caused by China's decision to devalue the yuan.  
According to Reuters, the euro has become a popular funding currency for emerging market investors and other individuals borrowing in currencies that have low interest rates. It has also been gaining from traders ditching their risky assets.
The Norwegian krone slipped to a seven-month low against the euro, after the Norwegian economy slowed in the second quarter of 2015. (Get set for more monetary easing in the next few months.)
This week has seen the emerging markets hit hard, with Turkey's lira losing its wings and plummeting to a record low. Worries concerning oil oversupply and plunging prices have been exacerbated by the turbulence in Chinese markets. 

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