A softer speech on inflation from the Federal Reserve Chairman in Jackson Hole sent the dollar down 1%. The greenback, which has fallen 11% since March 23, continues its correction on Friday. The euro rose back from the level of 1.19 dollars to 1.1920.

Jerome Powell, the chairman of the Federal Reserve (Fed) wants to “out of the darkness” the American economy. On the long road to a return to full employment, it is ready to let go of inflation and even if the dollar, the world's leading currency, is to lose its soul. The Fed will be able to tolerate occasional surges above the 2% inflation target, which thus loses its “sacred” and binding character. It was Ben Bernanke who set this level in 2012. Before, the Fed was more flexible. In July, consumer prices had increased by only 1% over the last 12 months. Patrick Harker, the president of the Federal Reserve of Philadelphia, estimated on Friday on the CNBC channel that the Fed could tolerate inflation above 3%.

“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 Jackson Hole speech, the greenback has fallen 1% in a general correction. Rather rare, it lost ground against the 28 major currencies. The euro climbed back above $1.19 at 1.1920. Hedge funds are betting on the continued rise of the European currency against the dollar.

Following in the footsteps of the Fed

On Twitter , Vitor Constancio, the former vice president of the European Central Bank (ECB), said the Fed's new approach to inflation “should be embraced by the ECB and other major central banks. 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 pushed 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.

Currency 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, from the Brookings Institution . The Fed had put it in place during World War II 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.

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%.

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