- As Fed officials hoped for a shift away from jumbo rate increases, the surging US Dollar crashed this week.
- UBS stated that the Fed will not cut rates and the greenback could rise.
- According to its strategists, the Ukraine war drags on, which will impact the euro and strengthen dollar.
According to UBS analysts, the strength of the dollar is expected to continue for some time because a Federal Reserve pivot will likely not take place.
The US currency has experienced a sharp appreciation this year compared to its major international counterparts. The Fed’s interest rates hikes pushed the Fed’s rate of change almost 16% higherWeakness in currencies such as the euroThe British pound.
However, US dollar indexThe market retreated slightly earlier in the week as investors began to believe that the central bank would stop its aggressive monetary tightening. Those hopes were fueled in part by the fall in US job opportunities and a lower-than expected rate rise in Australia.
However, UBS’s analysts, led by CIO Mark Haefele, think the Fed is likely keep up its pace of jumbo rate hikes, which typically strengthens the dollar as higher yields attract foreign investors.
They wrote to clients Wednesday that they believe it was too early to label a peak in Fed hawkishness, or a top of the greenback.
“The US has many job opportunities that are more than the unemployed. However, the core personal consumption expenditure price index shows that inflation remains high.
“The central bank’s work is still not finished,” stated Chair Jerome Powell.
Mary Daly (president of the San Francisco Fed) stressed that the central banking was focused on cooling the inflation by increasing rates. However, she stressed that the central bank would not ignore signs and symptoms of economic stress. This is a concern for investors who are worried about a possible recession.
The US dollar index measures the dollar against six currencies and rose 0.36% to 111.49 on Thursday morning.
UBS says that Russia’s ongoing war in Ukraine is likely to have an impact on Europe’s economies and boost the dollar, while hurting the euro. The eurozone currency plunged 12.4%, falling in and out of parity with the buck. At last check on Thursday, it was trading at $0.989898.
Haefele’s team stated that “global uncertainty will likely remain high as the conflict in Ukraine continues.” “The conflict is a significant headwind for euro, which is the largest component in the DXY index.”
They added that they maintained a least preferred rating for the euro. “Against this backdrop we continue to see broad Dollar strength until the end the first quarter of next year.”
UBS’s team stated that the September US jobs report, due to be released Friday, should give investors a clue as to the Fed’s future stance regarding monetary policy.
The market is looking out for reasons why policymakers should shift to cutting rates, increasing by smaller amounts, and sticking to their current hawkish approach.
The central bank has two mandates: to keep inflation low and to keep unemployment low. A rise in unemployment could give it the opportunity to adjust to more aggressive rate increases.
UBS analysts indicated that investors will be closely watching the UBS consumer price index release next week. This will provide the Fed with an indicator of its progress in fighting inflation.
