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USD: Markets over-reaction to weaker than expected US data - MUFG

FXStreet (Delhi) – Derek Halpenny, Research Analyst at MUFG, suggests that the US dollar will continue to suffer in current circumstances but we do not see the current weakness of the dollar as being sustainable.

Key Quotes

“The Beige Book for the FOMC meetings on 27th/28th October was released last night with nine of the twelve Fed districts describing economic growth as modest or moderate. There was a mention of a strong dollar playing a role in dampening manufacturing activity but generally the report was consistent with growth continuing at a moderate pace.”

“No doubt the financial markets will find further reason for removing Fed rate increases from the market again today in the wake of the CPI data. The overall annual CPI rate is set to turn negative again and if this drags the core rate lower from 1.8% to say 1.7%, the markets will have further reason to price in a Fed delay. But this would again be an over-reaction.”

“Underlying price pressures are at best stable and possibly drifting modestly higher. The Cleveland Fed’s measure of inflation – the Trimmed Mean annual CPI rate is currently at 1.7%. Taking the expansionary period as a whole (from Q3 2009), the average level for this measure of inflation is exactly that – 1.7%. There is little evidence of even disinflation in this measure of inflation.”

“But as long as the FOMC continue to procrastinate on implementing the tiniest of rate increases the more the markets will view incoming economic data negatively.”

“If the Fed is wrong to be fretting like this, the data will soon convince them to move. If the Fed is correct, central banks elsewhere have much more scope for monetary stimulus than the Fed.”

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