Wonderful Week With Good News for US Dollar

The US dollar soared against all major currencies after President Biden officially re-nominated Jerome Powell as Fed Chair and Lael Brainard will become Vice Chairman when Richard Clarida’s term ends in January.

Greenlight for Policy Normalization

When it comes to heads of central banks, investors generally prefer continuity which explains why the US dollar instantly jumped higher Monday. After months of uncertainty, investors see Monday’s decision as a greenlight for further policy normalization.

At the beginning of November, the Fed said it will begin to taper asset purchases but over the past week, a growing chorus of central bankers are calling for faster taper or rapid removal of accommodation including Vice Chair Clarida, Governor Waller and Fed President Bullard.

PCE Deflator, FOMC Minutes

Demand for US dollars is expected to be healthy this week with the PCE deflator and FOMC minutes scheduled for release on Wednesday.
Hopes for continued gains in economic activity and employment, on the one hand, are practically at war with inflation and price pressures, on the other hand while policymakers insist that inflation and other negative factors are transitory.

The market will make its own judgement about inflation when the PCE deflator is released. Core PCE is the Fed’s preferred measure of price pressure and it is widely expected to show prices ticking higher.

With the FOMC minutes coming after PCE, investors are likely to focus on the central bank’s economic outlook.

Stronger Dollar

USD/JPY flirted with 115 while EUR/USD dropped to fresh 16 month lows on Monday’s decision. With President Biden’s comments on the economy expected to be mostly positive and US Markit PMIs to edge higher after stronger Empire State and Philadelphia Fed surveys, further gains are likely for the US dollar.