FX.co ★ US dollar rallies as Fed downplays inflation concerns

The US dollar continues to show strong performance. The rapid pace of the US economic recovery as well as the risks posed by a devastating third wave of the coronavirus pandemic have contributed to stronger demand for the greenback.

The value of the US dollar against a basket of six world currencies has almost reached its April high and is currently trading at 92.78. The euro lost 0.7% against the US dollar, falling below its 3-month low, $1.1778. The dollar’s rally was also supported by a record surge in US consumer prices. The inflation rate in the country jumped by 5.4%, hitting a 13-year high. Core inflation rose by 4.5%, posting the largest increase since 1991. This was supposed to trigger a swift monetary policy tightening response from the Fed. However, the regulator sees this explosive rise in consumer prices as a temporary phenomenon. Indeed, inflation may slow down in the coming months. Nevertheless, it will take quite a while, especially given a booming US economy and Americans with their pockets full of money. According to ING Chief International Economist James Knightley, considering the pandemic and its impact, supply chain disruptions, as well as labor shortages, demand seems to be outstripping economic growth.

This year, the Fed will have to at least start winding down its bond-buying program that implies $120 billion in monthly bond purchases, Knightley believes. This, in turn, will most likely support the US dollar, he notes.