The release of the February Federal Open Market Committee (FOMC) minutes gave little comfort to Dollar bears, according to economists at ING. The consensus of the FOMC agreed that further rate increases were necessary and that inflation remained unacceptably high. There were no hints of a pause, and the market pricing of three more 25 bps hikes from the Fed over the March, May and June meetings suggests that the Dollar is likely to remain on a solid footing in the near term.
Dollar bears will have to be patient if they want to see the Dollar weaken. Activity and price data will have to soften over the coming weeks to make an impact on an otherwise hawkish Fed. ING’s first quarter game plan is that the Dollar does not hold onto its current gains, but for the time being, it looks like the Dollar wants to probe higher to the 105.00 area with outside risks this quarter to the 106.00/106.50 area.
The FOMC’s hawkish stance suggests that the Dollar is likely to remain strong in the near term. With inflation remaining unacceptably high, the Fed will likely continue to raise interest rates in order to keep prices in check. This will likely lead to further appreciation of the Dollar against other currencies, as investors seek out higher yields.
The strength of the Dollar will also have an impact on the US economy. A stronger Dollar makes US exports more expensive for foreign buyers, which could lead to a slowdown in US exports. It also reduces the purchasing power of US consumers, making imported goods more expensive and leading to an increase in prices for US consumers.
Overall, the strength of the Dollar will likely remain strong in the near term, as the FOMC continues to raise interest rates. However, if activity and price data soften over the coming weeks, then the Dollar may start to weaken. In the meantime, Dollar bears will have to be patient and wait to see if their predictions come true.
