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Flash: USD strength derives from anticipations of Fed Tapering - DBS Group

FXstreet.com (Barcelona) - DBS Group analysts note that the US dollar has been strong this month on speculation that the Federal Reserve may taper asset purchases as early as this summer.

They feel that this was a dramatic change from the greenback’s weakness in April when the Fed first noticed that inflation was “well below” its 2% inflation target and in turn, this paved the way for the insertion of a new line, “to increase or to reduce the pace of its purchases”, into the FOMC statement at the last policy meeting on May 1. Since then, they note that US jobs numbers stopped disappointing except for last week’s jobless claims data. They feel that most Fed officials reckoned that the abnormality in the Phillips Curve will eventually be corrected, that is, inflation should start rising on lower unemployment rates.

However, the team see that inflation retreated again last week and comment, “Needless, all eyes will be on Fed Chairman Ben Bernanke’s testimony to the Joint Economic Committee today. Those hoping for Bernanke to break the deadlock in the asset purchases debate will probably be disappointed. Bernanke is likely to favor a wait-and-see approach.” They continue, noting that after all, both the unemployment rate and inflation are about one percentage point away from the Fed’s self-imposed targets warranting ultra-low rates.

They note that the jobless rate has fallen to 7.5% vs the 6.5% target while inflation, on the other hand,
is headed in the wrong direction and is generally about 100 bps below the 2% target. In short, they see that the Fed is encouraged but not satisfied by the improvement in the jobs market, and worried but not alarmed with falling inflation yet. They finish by writing, “One thing is clear. If Bernanke stays uncommitted on whether to increase or taper asset purchases, it is premature to discuss the timing of the next move. Hence, the US dollar may well have to return some of its gains discounting an imminent tapering.”

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