USD remains stagflation hedge; but euro, pound face greater uncertainty
THE US dollar index rose slightly after following the United States Federal Reserve’s announcement of a 75-basis-point hike in its benchmark rate, as markets seemed to focus on Fed chairman Jerome Powell’s comment that the quantum of the hike — the largest since 1994 — is “unusually large”.
In a note following the move, Bank of Singapore analyst Sim Moh Siong said he remains optimistic on the position of the greenback as a stagflation hedge. He was less upbeat on the outlook for the euro and British pound.
Sim expects rising prices will continue to warrant further action from the Fed in tightening interest rates. He estimates that the yields on the 10-year US Treasuries will rise further towards 4 per cent, from around 3.3 per cent at present.
He is therefore expecting the US dollar to rise in the near term, against most major currencies, although his 12-month forecast has some expectations of a weakneing.
Meanwhile, he cautioned that the Euro is not yet “out of the woods”, despite the European Central Bank’s (ECB) recent move to calm credit markets. The ECB had on Wednesday held an emergency monetary policy meeting and said the appropriate ECB committees are accelerating the design of a new anti-fragmentation tool, although few details on its design and implementation were announced.
Sim said the rallying oil prices will increase the challenges of managing the euro, as higher European gas prices will either add to budget deficits or cause local gas suppliers to lose money.
His cautionary view extends also to the pound, whose outlook he believes will remain clouded by elevated political uncertainty and concerns that the ongoing growth slowdown in the United Kingdom is likely to make the Bank of England (BoE) more cautious with further tightening.
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