Currency Briefing: Divergence between Fed and ECB’s monetary policies likely to lead to dollar strength

on Nov 18, 2013
Updated: Oct 21, 2019

Recent developments have convinced many analysts the dollar could make a comeback against the euro next year, as the U.S. and Eurozone take separate monetary policy paths. Some economists and market participants believe now the Fed will not begin scaling back its monetary and economic stimulus before March 2014 at the earliest.

Meanwhile, the ECB lowered its benchmark interest rate on Nov 7 to a record low 0.25 per cent and last week ECB official Peter Praet announced that the central bank could adopt negative interest rates if necessary to bring inflation to target. This announcement fuelled additional downward pressure on the euro.
“The euro is near the peak and we should be looking for the dollar to gradually recover,” said Marc Chandler, global head of foreign exchange strategy at Brown Brothers Harriman.

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The dollar, meanwhile, should be buoyed by improved economic growth in the U.S. which should grow at a rate of nearly 3 per cent next year, according to the Conference Board.
On Friday however, the dollar lost ground after the Empire State Index fell to a negative 2.2 reading in November from a positive 1.5 in October, whereas economists had forecast a positive 5.5 reading.

“While we will await confirmation from other regional surveys over the coming weeks, the unexpected decline in the Empire survey may be hinting at a delayed retrenching in manufacturers’ attitudes following the shutdown,” said a strategist at TD Securities.

The greenback’s move came a day after Senate testimony from Federal Reserve vice Chairwoman Janet Yellen was widely seen as encouraging and supportive for continued stimulus. Ms. Yellen vigorously defended the Fed’s current bond-buying program, though her comments were in line with her prepared remarks released a day earlier. The Fed currently buys $85 billion-a-month in Treasury and mortgage backed securities in an effort to stimulate the economy, purchases that weigh on the dollar as a result of the money-printing machine required to make them.

Today, the economic calendar will not be abundant. However, the Eurozone is to release data on the Current account (09:00GMT) and Trade balance (10:00GMT) for September, whereas the U.S. is to release private sector data on the outlook for the housing sector (15:00GMT).
Several Fed officials are scheduled to produce their speeches today as well, with the most important amongst them being probably the Philadelphia Fed’s President Charles Plosser who said last week the QE was an aberration to the Fed’s monetary policy mandate. Policymakers’ comments and remarks will therefore continue to weigh on the markets, having an immediate prompt or vague impact on investors, recently engaged in scrutinizing any indication for the future monetary policy.
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Prices can go up and down meaning you can get back less than you invest. This is not advice. Dealing services provided by Hargreaves Lansdown.
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