Globally, the dollar remains weak. Representatives of a group of emerging markets are supported by the sentiment on global stock markets and the situation in US bond prices, which in the first part of the year pushed risky currencies and assets into trouble.
Dollar indifferent to inflation records
In May, the US consumer prices were by 5% higher than a year ago. Such a strong price pressure in the US economy has not been observed since 2008. Also, in month-on-month terms, the result of 0.6% is almost record-high compared to recent years. Moreover, the index once again exceeded market expectations. We should add that core prices also maintained a sharp upward trajectory - they were 0.7% higher than a month ago. Significant contributions to the high readings came from statistical base effects, pandemic-induced disruptions and the subsequent reopening of the economy. As was the case a month earlier, significant contributions included used car prices.
In this context, the Fed's judgment that the price spike is temporary remains valid. However, upward pressure on prices is evident in a growing number of categories of goods and services. The reading, which was the highest in thirteen years and exceeded forecasts, has neither supported the dollar nor triggered a rise in bond yields. On the contrary, the yield of bonds maturing in ten-years dropped to the lowest level in three months and on Wall Street, the S&P 500 index once again broke all-time highs. After two successive months of disappointments about the pace of post-pandemic job recovery, there is no conviction that the Fed will be willing to signal the proximity of an announcement of the start of a retreat from an extremely soft policy at next week's meeting. The labour market is the priority at the moment.
Greenback's exchange rate without Fed's support
However, the tension among policymakers between the goal of full employment and price stability may be growing stronger with each passing month. Year-on-year inflation is now a night-and-day comparison. A year ago, restrictions were in place, and the pandemic outbreak was a shock, creating great uncertainty and affecting consumer and business decisions very strongly. Now a wave of deferred demand is spreading through the reopening economy. Price dynamics is probably reaching its peak (both in the USA and Poland). Its trajectory should start declining, but it is becoming more likely to be much slower than central banks would like.
At some point, the Fed will make a shift in its stance. For the time being, however, it should remain true to its current rhetoric, as only time can disprove the thesis that the pick-up in inflation is temporary. This makes it clear that the dollar (in an environment of strong global growth and loose financial conditions) should remain weak in the next quarter. At some point, the vision of policy normalisation will begin to appear on the horizon, particularly faster than in the eurozone (just as growth in the USA will accelerate). However, this is probably a perspective of 2022.