Goldman Sachs Economic Research explains the reason for the drop in the US dollar despite relatively stable nominal rate differentials.
Front-end market pricing for Fed hikes is roughly unchanged since the start of 2017, with about 125 bps priced through end-2019
Most hypotheses, like better global growth or a US inflation overshoot, don’t explain why nominal and real rate differentials are so stable, even as the currency has fallen
We believe the principal reason for the divergence is “Dollar down” rhetoric from the new administration, which we think highlights the constraints facing President Trump, rather than likely outcomes. After all, a policy mix that combines fiscal stimulus and protectionism is hard to reconcile with a weaker currency, even if that is what the new administration wants.
The last episode when USD diverged meaningfully below rate differentials began a year ago, when market fears over a large RMB devaluation were building. That episode lasted over six months, ending with the Nov. 8 election. The current episode should be shorter, with a good run for US data – our expectation – the tie breaker.
You may be interested
JPMorgan Chase Scores Another Bitcoin Technology PatentBrian Evans - Jul 22, 2018
Banks have shown a keen interest in Bitcoin technology over the years. Various patents have been filed by these financial institutions to explore new potential business use…
Crypto Markets See Solid Upswing, Bitcoin Pushes $7,500Brian Evans - Jul 22, 2018
Crypto markets seeing mostly green today, with total market cap up over 2% and Bitcoin pushing $7,500
Bitcoin Makes Major Headway: CFA Exam Will Now Include Crypto TopicsBrian Evans - Jul 22, 2018
Cryptocurrencies and blockchain technologies are making serious headway in the financial industry, the most recent sign being the decision by the CFA Institute, which offers the Chartered…