The US Dollar Makes A Spectacular Recovery
May 25, 2015
German Chancellor Merkel and French President Hollande said today that the Greek government needs to do more work to flesh out its reform program and satisfy creditors. On Friday, the Greek government said it expects to reach a deal within the next 10 days. On Sunday, local elections will be held in Spain and on Monday, US, UK and most European markets will be closed for local holidays. The euro took a header late Friday to close near the 1.10 level while the US dollar surged to 96.26.
The US headline inflation was perfectly in line with expectations at -0.2% Y/Y. The core reading was unchanged at 1.8% Y/Y, while a marginal decline to 1.7% Y/Y was expected. So, the report was very close to expectations. Still it triggered a sharp repositioning especially in the FX market. Although headline inflation dropped to a new cyclical low in April, this was mainly due to a significant drop in energy prices. Underlying price pressures remain however healthy with core inflation only slightly below the Fed’s 2% inflation target.
Federal Reserve chair Janet Yellen has said the central bank is on track to raise short-term interest rates this year, but will likely proceed slowly and cautiously because the job market hasn’t fully healed, inflation is low and growth has again disappointed.
The comments, made just a few weeks before the Fed’s next policy meeting June 16-17, were the latest indication from the central bank it is highly unlikely to start raising rates at that gathering but could do so later in the year if the economy picks up.
Yellen made clear that even after that initial move she has little inclination to move quickly. It could be “several years,” she said, before the federal funds rate is back at a level the Fed considers being normal in the long-run. Fed officials see the rate getting to 3.75 per cent someday. Their March forecasts showed that even at the end of 2017, they expected the rate to still be slightly below that level.