Even with a strengthening economic environment, we don’t see any inflation trouble ahead. This is partly because of falling energy prices, which makes up about 10% of the consumer price index. Other major global commodities, such as iron ore, corn, and rubber, have had big price declines and continue to trend lower. We also credit US dollar strength in recent weeks for putting the lid on commodity prices in general. A stronger dollar also helps lower import costs, which is another way to keep inflation under control. Thus, one of the beneficial side effects of stronger economic growth and rising expectations of monetary tightening is to boost the currency (and its purchasing power) while actually lowering inflation expectations.
Here is The Weekly View.
The USA’s virtual energy self-sufficiency puts it in a much stronger position to cope with a firming currency, in a competitive global environment, as the economy gradually recovers.
The Fed almost certainly intervened when the Dollar Index rallied above 84 in 2012 and 2013. Will they do so again? Possibly, although I would say they will be less concerned by this latest strength as the economy is firmer. However, it would not be surprising to see some consolidation before long as DXY has risen for 10 consecutive weeks and is becoming temporarily overextended. I do think the Fed would be concerned if DXY moved quickly back to the 2008 to 2010 highs above 88.Back to top