Can A Fed Interest Rate Hike Save The Dollar?

That’s usually the point of raising rates; to cool an overheating economy and reduce the chance of a bubble forming.

But, inflation is expected to pick up over the next several months. The economy is likely to still be shaky, and unemployment relatively high. So, the Fed likely won’t raise rates.

On top of that, they’ve said they’ll tolerate inflation as high as around 3.0%, which is over double what it is now. In other words, inflation can cut yields by as much as 1.6% over the next several months before the Fed even thinks about raising rates.

In the bond world, that’s a really big swing

Just 0.25% of change is enough to radically shift the bond market and change the course of the currency. So a whole percentage point is quite a radical change that could significantly disrupt capital flows.

Combine that with an increased appetite for risk, there is a strong case to suggest that a lot of market makers will be selling dollars over the coming months.

If we want to keep a handle on how the dollar index might behave in the mid-term, we want to keep a close eye on the gap between the core inflation rate and the interest rate.

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