US Dollar very weak once again

The dollar is one again weaker against the major currencies again and the euro is trying to break through the 1.2000 mark. It briefly crossed it yesterday for the first time since 2018. On the occasion of the Jackson Hole symposium, the US Federal Reserve unveiled its new monetary policy strategy. By adapting its inflation target from a 2% target to an average of 2% over a cycle, it is giving itself more flexibility to return to full employment in this period of social tension.  With current levels of unemployment and inflation, the Fed may remain accommodative for a long time to come, even when inflation exceeds 2%. The news weighed on the greenback. This is because with this new approach, as Jerome Powell explained, inflation could stay above the 2% target for a while before the Fed has to act by increasing interest rates. The Fed Chair repeated, as he has been doing for months, that the institution would use its “full range of tools to support the economy”. He wanted to be reassuring, recalling that the economy was solid before the pandemic. The unemployment rate was at its lowest level in 50 years and household incomes were on the rise. This favourable situation had also benefited Black and Hispanic minorities even if the differences with whites were still marked. It is therefore this new situation with the prospect of very low rates for several years in the United States that has weighed on the greenback and favoured Wall Street. It’s the zero-rate policy that President Donald Trump called for before the pandemic.

In the eurozone, the economic sentiment index improved in August by 5.4 points to 87.7 points. According to the European Commission, confidence is increasing in industry, retail and services. In Germany, renewed optimism among entrepreneurs continued for the fourth consecutive month. But consumer prices fell in August for the first time in more than four years due to a VAT cut planned as part of the government’s stimulus plan. German inflation fell 0.2% from July and 0.1% year on year even as economists expected it to remain stable.

In Switzerland, gross domestic product plunged 8.2% in the 2nd quarter – the largest decline since 1980. According to the State Secretariat for the Economic Affairs, the cumulative decrease over the first 2 quarters reached 10.5%. However, by international comparison, the contraction remains relatively contained. There are multiple reasons for that. Lockdown measures have been less severe than in other countries such as Italy, Spain or France. Several sectors such as construction or finance have not ceased their activity. And finally the support measures for industry and commerce such as part-time work or financial aid were put in place immediately after they were announced. The EUR/CHF parity is still moving above 1.0700 and has even momentarily broken the technical resistance of 1.0835-50. If tensions in the financial markets return, we will have to expect the SNB to intervene to curb the appreciation of the franc, but for the moment the rebound of the euro is working for the Swiss National Bank. Even if with an increase of CHF 1.6 billion – to 701.6 billion – for the week ending August 28, the demand deposits held seem to confirm a constant presence of the central bank on the markets. This is the eleventh consecutive week of increases.

The Central Bank of Australia held its rates steady yesterday following its monetary policy meeting.  At 0.25%, the base rate therefore remains at its historic low. On the other hand, it surprised the markets by increasing the amount that banks can borrow from it at this rate of 0.25% for three years. Per figures released this morning, the country’s GDP contracted by 7% in the second quarter. While less severe than expected, it is negative for the second consecutive quarter, which technically plunges the country into recession – the first in 29 years.

The ounce of gold is benefitting from the weakness of the greenback to return to test the mark of $2,000 an ounce after the period of profit taking and consolidation which saw it plunge, in five days, from its record from $2,075 on August 7 to $1,863 on the 12.