J. Powell at the head of the FED for four more years

The US dollar is still shining on the foreign exchange market. This Monday it hit a high for year against the euro at $1.1226 and posted gains against all the other main currencies as well. Against the yen, for example, it traded at its highest level since March 2017 (¥115). The greenback is buoyed by the expectation of soon-to-come rate hikes from the Fed. The expectations grew after Joe Biden’s decision to confirm current Fed chair Jerome Powell for a second four-year term at the head of the US central bank. The market sees Mr. Powell as more likely to tighten monetary policy than Lael Brainard, his competitor for the post who will now become vice chair. Thus, analysts have revised their forecasts for rate hikes up. They now expect three adjustments in 2022, with the first rate hike for 0.25% coming in the second quarter next year. The ounce of gold is also a collateral victim of the strong dollar. The precious metal has lost more than seventy dollars in value since 16 November, going from $1,870 to $1,795/oz. But it’s not only that the dollar is strong – it’s also that the euro is weak. The single currency is not benefiting from expected rate hikes, and it’s also being dragged down by concerns regarding the evolution of the pandemic and new lockdowns in Europe, particularly in Austria and Germany, as well as strong inflation. For the month of October, the increase in prices was confirmed at 4.1% year-on-year in the euro zone, the highest since the creation of the single currency, and the Bundesbank warns that the inflation rate could rise to 6% in Germany this autumn on an annualised basis. The market, for the time being, is still focusing on the recent messages of the European Central Bank which does not want to tighten its ultra-accommodative monetary policy any time soon as several of its members, including Christine Lagarde, have stated.

The weakness of the euro is not giving the Swiss National Bank any respite, and, despite its interventions, the franc continues to soar. In March last year, at the height of the turmoil, the bank spent hundreds of billions to defend the level of 1.0500 francs to the euro. The publication of demand deposit figures shows that the central bank has maintained its activity in recent days. But in an admittedly different context, it had to allow the franc to break this psychological threshold. With a low of 1.0444 last Friday, the franc hasn’t traded this high against the euro since the end of 2015 and the rebound that followed the abandonment of the floor rate. The strength of the dollar and the prospects of rate hikes in several OECD countries are giving the SNB some hope, as the franc is falls against other currencies.

The collapse of the lira continues after the Central Bank of Turkey’s new decision to cut interest rates. As feared, the institution lowered its base rate by 100 base points to 15%. In a tense inflationary context, the market did not like this decision and sent the Turkish currency into the abyss. At its peak this year, it took 6.90 lire to buy one dollar. At yesterday’s peak, it took 13.45 lire, virtually double, even as President Erdogan defended the rate cuts.

The Central Bank of New Zealand raised its benchmark rate from 0.25% to 0.75% this morning. The RBNZ said it was necessary to reduce monetary stimulus and combat rising inflation. The RBNZ expects inflation to peak at around 5% in the short term before falling back towards 2% over the next two years.

Announcements of new lockdowns in Europe in the face of a fifth wave of cases have accentuated the fall in crude oil prices which, at $75.68 a barrel for WTI crude and $78 for Brent yesterday, were at their lowest level since the beginning of October. It is a welcome downturn that eases global inflationary pressures but penalises related currencies such as the rouble. The Russian currency, which had briefly fallen below 70 roubles to the dollar, is now trading at around 75 roubles. The Biden administration’s decision to dip into its reserves and put pressure on OPEC had only a limited impact on the price of oil. Analysts believe that the use of reserves by the US, China, Japan, India, South Korea and the UK, the world’s biggest oil consumers, will have only a limited effect as these reserves will have to be replenished by the refineries that use them.