A softer speech on inflation from the Federal Reserve Chairman in Jackson Hole sent the dollar down 0.7%. The greenback, which has fallen 10% since March 23, continues its correction on Friday. The euro rose back from the level of 1.19 dollars to 1.1910.

At the Jackson Hole meeting, Jerome Powell, the central bank's president estimated that it was aiming for inflation of 2% on average in the long road to full employment. But it will be able to tolerate occasional pushes above this objective, which thus loses its “sacred” and constraining character. It was Ben Bernanke who set this level of 2% in 2012. Before, the Fed was more flexible. In July, consumer prices had increased by only 1% over the last 12 months.

“The focus on supporting jobs and skepticism about accelerating inflation signals to markets that the Federal Reserve will aggressively stimulate the economy. This new framework for monetary policy favors a weakening of the dollar for a long period,” comments Steve Englander, head of G10 currency strategy at Standard Chartered. Since the speech, the greenback has lost 0.7%, and the euro has climbed back above $1.19 to 1.1910.

Following in the footsteps of the Fed

“We do not believe in a prolonged decline in the dollar. Other central banks should follow in the footsteps of the Fed and follow its example on inflation, which will lower their currencies,” said Viraj Patel, strategist at Arkera. . In Europe, eurozone GDP is not expected to return to its 2019 level until 2023 and later in some countries. Allowing inflation to exceed the 2% target is a good thing after a major economic crisis”.

“Ideal” yield curve

Greater tolerance for inflation drove up the US 10-year bond rate, which stood at 0.74% versus 0.53% at the start of the month. The Federal Reserve is watching the yield curve closely to avoid highly damaging strains in the bond market that would complicate the recovery of the economy. Jerome Powell did not mention in his Jackson Hole speech a massive deterrent against market speculation. The Fed would decide that yields on 2, 5, and 10 year rates should not exceed certain thresholds. It would buy the various bonds to lower their yields and create an “ideal” rate slope. In a quantitative easing plan, the Fed announces in advance that it will buy a certain amount of bonds. This time, she would not give any amounts and information to the markets. It would imply that it would intervene whatever the cost to limit the rise in long rates.

monetary bazooka

This new monetary policy tool, implemented in Japan for several years, “was favored by certain members of the Fed and former presidents such as Ben Bernanke and Janet Yellen, even before the coronavirus crisis, notes David Wessel, of the Brookings Institution. The Fed had implemented it during the Second World War so that yields on long rates would not exceed 2.5%. This tool was adopted last March by the Australian central bank, which aims, for example, to set the Australian 3-year rate at 0.25%. »

This new course in monetary interventionism has not yet been crossed. It would be very negative for the evolution of the dollar. At its lowest since May 2018, the greenback has lost almost 2% since the start of the year and 5% against the euro. The consensus of the forecasts established by the Bloomberg agency anticipates that the dollar will rise overall by nearly 2% by the end of the year.

The fall of the dollar favors world trade

The phases of the dollar's decline coincided with stronger global growth, particularly in emerging countries. More than half of world trade not involving the United States is denominated in dollars. In some countries (Brazil, Indonesia, India, Colombia, South Korea, Malaysia, Canada, etc.), more than two-thirds of their trade (imports and exports) is carried out in dollars. The decline in the greenback lowers the cost of imports for many countries. According to Goldman Sachs, a 10% drop in the dollar (like the one that has occurred since March) boosts world trade outside the United States by 5%.