Stronger dollar is out of the question for now - SocGen

Kit Juckes, Research Analyst at Societe Generale, suggests that the term ‘Currency Wars’ was used by Brazil’s erstwhile Finance Minister, Guido Mantega, in September 2010 in response to moves by some (Asian) countries to resist upward pressure on their currencies from the weak US dollar.

Key Quotes

“Abenomics spread the fight into new territory as the yen fell, and the ECB opened a new front last year. But since September 2010, the Brazilian real, South African rand and Russian rouble have all lost half their value against the US dollar. The euro and yen have fallen by 18% and 26%, respectively. And now, just as the ECB and BoJ find that cutting rates even further does not achieve much, the US is effectively declaring a unilateral truce.

The Fed is worried about low inflation expectations and is planning to raise rates more slowly. That does not (yet) mean that the dollar’s 4.5y rally is over for good, but it does mean it is over for now.

US inflationary pressures are now building, albeit very slowly. It is the market pricing of inflation expectations that is frustrating the Fed, not the actual core CPI and PCE deflators. Japan’s core CPI jump has stalled, and Europe’s is still stuck below 1%, but the US has surprised on the upside for several months in a row. If the ECB and BoJ cannot get rates down enough to jump-start inflation expectations, and if the US feels the need to have very low real rates in order to give inflation expectations a further kick, even as actual inflation rises, then a stronger dollar is out of the question for now.”